Mergers and acquisition (M&A) practices vary – indeed, practitioner lore is that every deal is unique.  But M&A deals have much in common.  M&A contracts, techniques, and outcomes vary systematically.  While practitioners exploit such patterns, few have been reported, analyzed, or considered in academic research, and not all practitioners fully reflect these patterns in their practices.  In a recent working paper, available here, I show that ownership dispersion is a first-order determinant of M&A practices.  Firms with dispersed ownership are more salient, and tend to be larger, but dispersion varies significantly even at large US businesses, and affects M&A deal size, duration, techniques, contract terms, and outcomes.

Privately held firms are an important part of the US economy, as is private target M&A. Most US business corporations had 100 or fewer owners, and those firms generated 20+% of corporate receipts in 2006.  Of businesses with more than $250 million in assets, only 18% were C corporations with 500+ shareholders.  Even at public companies, dispersion varies significantly.  A few have millions of record owners, and 500+ have 15,000+ shareholders. But 500+ “public” companies have fewer than 50 record shareholders, and over a third have fewer than 300 record holders.  These companies are the reverse of firms that have “gone dark” – they could deregister with the SEC, but instead voluntarily choose to “remain lit” and file regular reports.

…continue reading: Ownership’s Powerful and Pervasive Effects on M&A

The SEC yesterday formally released an anticipated new initiative designed to encourage individual and company cooperation with SEC investigations and enforcement actions. [1] The initiative, laid out in a new section of the enforcement manual for the Division of Enforcement entitled “Fostering Cooperation,” (the “Initiative”) establishes incentives for early, substantial, robust cooperation with the stated goal of ensuring “that potential cooperation arrangements maximize the Commission’s law enforcement interests.” [2] The Initiative provides guidance for evaluating an individual’s cooperation and authorizes new cooperation tools, including cooperation agreements, deferred prosecution agreements and non-prosecution agreements. While the new Initiative provides more options for the Enforcement Division and individuals, only time will tell if it proves to be the “game-changer” that Enforcement Director Robert Khuzami anticipates.

…continue reading: SEC Releases Initiative to Foster Cooperation

In our paper Capital Allocation and Delegation of Decision-Making Authority within Firms, which was recently published on SSRN, we examine the allocation of capital and the delegation of decision-making authority within firms. Theoretical research examines how decision-making authority is delegated within groups. While the theoretical implications are far-ranging, there is a scarcity of empirical evidence about the delegation of authority within corporations (as noted by Prendergast (2002) and others). This paper provides some of the first empirical evidence that focuses on the delegation of decision-making authority with respect to major corporate policies. In particular, we study whether the chief executive makes decisions on her own versus delegating to lower-level executives and divisional managers.

We survey more than 1,000 CEOs and CFOs around the world to determine who within the firm makes five different corporate decisions: capital allocation, capital structure, investment, mergers and acquisitions, and payout. Most of our analysis focuses on the 950 CEO and 525 CFO survey respondents who work in U.S.-based companies, though we also examine smaller samples of Asian and European executives. Knowing the job title of the corporate decision-maker is important, given recent evidence that executive-specific fixed effects appear to drive some corporate policies.

…continue reading: Capital Allocation and Delegation of Decision-Making Authority

Risk oversight is a high priority for today’s boards of directors. The risk oversight playbook is likely to evolve as boards refine their processes into 2010 and beyond. There are signs that legislators and regulators have risk oversight in their line of sight. For example, in the United States, the SEC proposed new proxy disclosures to spotlight directors’ qualifications and the role of the board in the risk management process. Some U.S. law- makers are sponsoring a bill to mandate a separate risk committee of the board. Whatever happens, it is clear the bar is being raised as boards take a fresh look at the qualifications of their members, how they operate, the extent to which they avail themselves of the appropriate company officers and other expertise to understand the enterprise’s risks, and whether their committee structure and the information to which their committees have access are conducive to effective risk oversight.

Key Considerations

“Risk oversight” describes the board’s role in the risk management process. Effective risk oversight deter- mines that the company has in place a robust process for identifying, prioritizing, sourcing, managing and monitoring its critical risks, and that this process is improved continuously as the business environment changes. By contrast, “risk management” is what management does to execute the risk management process in accordance with established performance goals and risk tolerances. Through the risk oversight process, the board (1) obtains an understanding of the risks inherent in the corporate strategy and the risk appetite of management in executing that strategy, (2) accesses useful information from internal and external sources about the critical assumptions underlying the strategy, (3) is alert for possible organizational dysfunctional behavior that can lead to excessive risk taking, and (4) provides input to executive management regarding critical risk issues on a timely basis.

…continue reading: Risk Oversight: A Board Imperative

For many public companies, the new year marks the commencement of compensation season. Setting pay and targets for the new year, determining achievement of performance objectives for the past year and preparing the annual proxy statement contribute to a busy first quarter for compensation committees and management teams working with them. In 2010, companies will undertake these activities in a fluid environment, with executive compensation continuing to receive significant attention from shareholder activists, government and the media. As companies prepare for the upcoming compensation season, they should consider the following items.

New SEC Disclosure Requirements. Companies should take steps to ensure compliance with the new SEC rules which, among other things, address corporate governance matters, risk in compensation programs, independence of compensation consultants and the valuation of equity awards in the compensation tables (see this Forum post or this Wachtell, Lipton, Rosen & Katz client memorandum for a description of the new rules). Companies should get an early start on organizing appropriate working groups, crafting necessary disclosures and preparing their directors so that they can meet their obligations with respect to upcoming filings.

…continue reading: Compensation Season 2010 – Issues to Consider

Let me preface my testimony by stressing the urgent need for broad regulatory reform in light of the financial crisis on matters ranging from the structure of our regulatory system, to the reduction of systemic risk in the derivatives market, to improving resolution procedures for insolvent financial companies, to increasing consumer protection, and to revamping the GSEs. The Committee on Capital Markets Regulation dealt with these issues in its May 2009 Report titled The Global Financial Crisis: A Plan for Regulatory Reform. These issues were also fully laid out in the Treasury Department’s June 2009 proposal on financial regulatory reform, and have been vigorously debated in public meetings, the press, and Congressional hearings for months. These efforts have so far culminated in the Wall Street Reform and Consumer Protection Act (H.R. 4173) as well as in Senator Dodd’s thoughtful Discussion Draft. And I applaud the ongoing efforts of this Committee to reach bipartisan consensus on these issues. In my judgment, we should not hold up these important reforms while we debate activity and size limitations.

…continue reading: Implications of the “Volcker Rules” for Financial Stability

For the second year in a row, Skadden, Arps, Slate, Meagher & Flom LLP has published a collection of commentaries addressing what we see as critical legal issues and areas of focus by businesses and industry sectors likely to be in the forefront of the matters considered by the U.S. and global financial and business communities in the year ahead. Many of these are a direct or indirect product of the national and global financial and economic crises of the past two years. By far the most powerful force that will drive these issues and areas of focus in 2010 is the continuing activist response of governments around the world to the recent financial and economic crises.

Nowhere is this more clearly illustrated than by the dramatic intervention of the federal government in the U.S. with respect to fundamentals of its financial and economic systems. In this regard, two of the major thematic questions from 2009 that will continue to dominate and shape the business environment in 2010 and beyond are:

…continue reading: Commentaries on Critical Legal Issues in 2010

In our paper Dividend and Corporate Taxation in an Agency Model of the Firm, which is forthcoming in the American Economic Journal: Economic Policy, we propose a simple model based on the agency theory of the firm (Jensen and Meckling 1976) that provides an alternative to the two leading theories of corporate taxation – the “old view” (Harberger 1962, 1966, Feldstein 1970, Poterba and Summers 1985) and the “new view” (Auerbach 1979, Bradford 1981, King 1977). Our model is motivated by empirical studies of the 2003 dividend tax reform in the U.S. (e.g. Chetty and Saez 2005), which found that: (1) the 2003 dividend tax cut caused large, immediate increases in dividend payouts, and (2) the increases were driven by firms with high levels of share ownership among top executives or the board of directors. These empirical findings are difficult to reconcile with the two leading theories of corporate taxation.

…continue reading: Dividend and Corporate Taxation in an Agency Model of the Firm 

Seven major law firms — Cravath, Swaine & Moore LLP, Davis Polk & Wardwell LLP, Latham & Watkins, LLP, Simpson Thacher & Bartlett LLP, Skadden, Arps, Slate, Meagher & Flom LLP, Sullivan & Cromwell LLP and Wachtell, Lipton, Rosen & Katz — collaborated on a 17-page comment letter  in response to a request by the SEC last December for additional comments on its proposed proxy access rules.  These seven firms previously submitted a comment letter  last August on the proxy access proposal, which was described on the Forum here.  In light of the additional data and analyses cited in the SEC’s request for additional comment, as well as the recent comments by some of the Commissioners regarding the possibility of permitting shareholders to approve a more restrictive proxy access standard, the comment letter elaborated on the seven firm’s earlier recommendation that shareholders should have the opportunity to modify or opt-out entirely from the SEC’s proxy access regime if Rule 14a-11 were adopted.  As currently proposed, Rule 14a-11 only permits shareholders to adopt less restrictive provisions (a one-way opt-out) to facilitate proxy access.  The most recent seven firm letter recommended that shareholders should be permitted to adopt either more or less restrictive provisions (a two-way opt-out), including a complete exemption or an alternative regime, for the following reasons:

…continue reading: Seven Law Firms Comment on “Opt-Out” Under SEC’s Proposed Proxy Access Rules

Last year’s headlines were filled with announcements of major new insider trading prosecutions. The DOJ and SEC have promised there will be more such cases to come in 2010, including through the use of more aggressive investigative techniques such as wiretaps and wired informants. The question is what can a firm practically do to stop insider trading, and if the risk of improper trading cannot be entirely eliminated, how to protect the firm and its constituencies?

Most responsible firms of sufficient size — hedge funds, investment advisors, broker-dealers and banks — have adopted and implemented written policies and procedures that are fairly standard. These written policies are helpful in educating people about the bright lines, but, as typical policies candidly recognize, they cannot cover every situation. In today’s world — which reflects an exponential expansion of the sources of information, as well as the means and speed of communication and the webs of relationships among trading professionals, consultants, advisors and corporate insiders — situations can arise where the lines are less than bright.

…continue reading: Combating Insider Trading: What Works