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

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

A group of fifty-one law firms has issued a White Paper, Interpretive Issues Related to Recent Changes to the New York Power of Attorney Law, which examines principles of New York and federal law to reach a finding that, at the least, substantial portions of the recently amended New York General Obligations Law §§ 5-1501 et seq. (the “Statute”) do not apply to proxies for shares of New York corporations and non-New York corporations, certain powers of attorney executed in connection with the registration of transfer of certificated securities or many powers of attorney granted in connection with the formation and governance of non-New York limited liability companies and non-New York limited partnerships.

On September 1, 2009, several amendments to the Statute, which governs powers of attorney executed by individuals while physically present in New York, took effect. These amendments, enacted as a result of perceived abuses in elder care connected to financial matters, including estate planning, changed the requirements for creating certain types of valid powers of attorney in New York. The amendments have given rise to troublesome concerns for transactional business lawyers, as the Statute appears potentially to have the unintended consequence of invalidating a wide variety of common corporate, commercial and financial documents. The purpose of the White Paper is to provide a blueprint for a consensus among practitioners on the issues it addresses because of the concern that an overly conservative interpretation of the Statute may become the accepted version of the law. The arguments in the White Paper are summarized below.

…continue reading: 51 Law Firms Issue Consensus Interpretation of NY Power of Attorney Law

Recently, in the Mergers and Acquisitions course at Harvard Law School, three preeminent M&A practitioners discussed the Merger Agreement as a Contract with Vice Chancellor Leo Strine, Jr., who teaches the class. The panelists were Rick Climan, a partner in the Mergers and Acquisitions group at Dewey & LeBoeuf LLP; Faiza Saeed, a partner in the Corporate Department of Cravath, Swaine & Moore LLP; and Kim Rucker, Senior Vice President and General Counsel of Avon Products, Inc.

The panel went through the main parts of an acquisition agreement, including:

• Representations and warranties;
• Disclosure schedules (”The power is in the disclosure schedules”, remarked Kim);
• Pre-closing covenants that apply between signing and closing, including the strength of covenants and the difference between covenants and closing conditions;
• Closing conditions, the standards to which they must be met, and the risk of a deal failing to close.  Faiza gave the example of the breakdown of the General Electric-Honeywell transaction, which led to a discussion of regulatory risks and their effect on the transaction, and the consequent standards of covenants to obtain necessary consents, such as “hell-or-high-water” provisions.

…continue reading: The Merger Agreement as a Contract

(Editor’s Note: This post is a statement by the Aspen Institute Business & Society Program’s Corporate Values Strategy Group, of which John Olson is a signatory, along with 27 other business, investment, academic, & labor leaders.  The complete list of signatories is available here.)

Introduction
We believe a healthy society requires healthy and responsible companies that effectively pursue long-term goals. Yet in recent years, boards, managers, shareholders with varying agendas, and regulators, all, to one degree or another, have allowed short-term considerations to overwhelm the desirable long-term growth and sustainable profit objectives of the corporation. We believe that short-term objectives have eroded faith in corporations continuing to be the foundation of the American free enterprise system, which has been, in turn, the foundation of our economy. Restoring that faith critically requires restoring a longterm focus for boards, managers, and most particularly, shareholders—if not voluntarily, then by appropriate regulation.

A coalition has been working for several years on what business and investors can voluntarily do to address market short-termism, including the reform of executive compensation to focus on long-range value creation (See Appendix). A new administration in Washington and unprecedented public attention to business and financial markets, offer a unique opportunity for public policy recommendations in pursuit of long-term wealth creation to gain visibility, and to obtain real traction.

Others will study and recommend actions to be taken by boards, managers and regulation to restore long-term focus. The recommendations in this document, directed at influencing the behavior of shareholders, present an important step towards an integrated approach to ensuring long-term wealth creation.

Shareholder Short-Termism
The word “shareholders” evokes images of mom-and-pop investors saving for their retirement or their children’s college tuition. Individual investors do participate directly in the market, but they are mostly passive and unorganized and their role has diminished in recent years. The largest and most influential shareholders today are institutions — including pension funds, mutual funds, private investment (or “hedge”) funds, endowments and sovereign wealth funds — many of which serve as agents for the providers of capital, their ultimate investors. For example, one-third of U.S. corporate equity today is held by mutual funds and hedge funds.

The diversity of investment vehicles contributes to healthy competition and liquidity and is a strength of our capital markets. Properly incentivized institutions of different kinds can contribute to long-term wealth creation. However, the influence of money managers, mutual funds and hedge funds (and those intermediaries who provide them capital) who focus on short-term stock price performance, and/or favor high-leverage and high-risk corporate strategies designed to produce high short-term returns, present at least three problems:

• First, high rates of portfolio turnover harm ultimate investors’ returns, since the costs associated with frequent trading can significantly erode gains.
• Second, fund managers with a primary focus on short-term trading gains have little reason to care about long-term corporate performance or externalities, and so are unlikely to exercise a positive role in promoting corporate policies, including appropriate proxy voting and corporate governance policies, that are beneficial and sustainable in the long-term. Risk-taking is an essential underpinning of our capitalist system, but the consequences to the corporation, and the economy, of high-risk strategies designed exclusively to produce high returns in the short-run is evident in recent market failures.
• Third, the focus of some short-term investors on quarterly earnings and other shortterm metrics can harm the interests of shareholders seeking long-term growth and sustainable earnings, if managers and boards pursue strategies simply to satisfy those short-term investors. This, in turn, may put a corporation’s future at risk.

…continue reading: Overcoming Short-termism: A Call for A More Responsible Approach to Investment and Business Management

For those that regularly read my blog, you know I was happy to see the SEC propose a requirement that would force companies to disclose the voting totals from their shareholder meetings more timely. It has always amazed me that some companies stonewall on the vote results – it’s a poor PR move as it riles shareholders (see this example) and they have to disclose it eventually. But I imagine they do this in the hope that shareholders – and the financial press – will lose interest in the story.

The SEC proposes that disclosure be made within four business days after the end of a shareholder meeting (on a Form 8-K or a periodic report). For a contested director election, the 8-K would be due within 4 business days after the preliminary voting results are determined. The proposal begs the question as to when “preliminary voting results are ‘determined’” (i.e. trigger date). Maybe I’m missing it, but there doesn’t seem to be any exception for other types of contested matters? Anyways, if it’s a contested director election, there could be two Form 8-Ks – one within four business days after the meeting’s end based on a preliminary vote and another one within four business days of the final vote being certified.

Importance of Tabulation Process

On page 44 of the SEC’s proposing release, the SEC provides its discussion of this proposal – and a cost analysis is on page 96. Understandably, there is not a detailed discussion of the tabulation process and what’s involved. But as I wrote about in the Fall ‘08 issue of InvestorRelationships.com (it’s free; just need to input contact info) – in my interview with Carl Hagberg – the time is now for companies to rethink how they process their votes as well as who they hire to do it.

For starters, you probably want to hire only those inspectors that have a well-defined process about how they inspect – and you probably should hire only those inspectors whom you feel comfortable would pass muster under the pressures of litigation (eg. an entity that is independent – perhaps one is not your transfer agent). With the loss of broker nonvotes, we can expect closer elections and more litigation over voting results. You need to protect yourself and not rely on procedures that historically have been pretty loose.

…continue reading: Musings: SEC’s Proposal to Report Voting Results

(Editor’s note: This post is by Scott Fenn, Senior Managing Director, Proxy Governance Inc.)

The Investor Responsibility Research Center Institute and PROXY Governance Inc. recently released an in-depth analysis of the proxy voting policies and recent voting records of seven of the largest exchange-traded fund (ETF) sponsors, which account for some 94% of the ETF market. Entitled “Proxy Voting by Exchange-Traded Funds: An Analysis of ETF Voting Policies, Practices and Patterns,” the study was commissioned by the non-profit IRRC Institute and conducted by PROXY Governance.

The findings indicate a considerable variation in the voting patterns and philosophies of these funds. The key research findings are as follows:

• There appear to be significant differences in the level of detail of proxy voting guidelines utilized by ETF sponsors. The ETF sponsors in the study that relied on guidelines provided by proxy advisory firms appear to have the most detailed and comprehensive, and prescriptive, guidelines. At the other end of the spectrum, Rydex has very summary guidelines that stipulate voting with management on virtually all issues.

• There is significant variation in the voting philosophies and patterns of the largest ETF sponsors, with some funds much more likely to vote against management on both shareholder and management-sponsored proposals than other funds

• The votes by the specific funds at selected 2008 annual meetings are generally consistent with the written voting policies of those funds. Case-by-case voting policies by many funds on most issues explain much of this consistency. In a few cases, however, specific votes were cast that appear to be potentially contrary to the fund’s written voting guidelines.

• Funds that rely heavily on a proxy advisory firm for voting guidelines or to make their vote decisions tend to vote against management proposals, and in favor of shareholder proposals, more frequently than those that rely on their own guidelines.

The study covers the following seven ETF sponsors – Barclays Global Investors (iShares), State Street Global Advisors (SPDRs), Vanguard Group (Vanguard ETFs), Invesco Ltd. (PowerShares), ProFunds (ProShares), Rydex Investments (RydexShares) and WisdomTree Trust (WisdomTree ETFs). (NB: Barclay’s Plc recently announced that it would sell its Barclay’s Global Investors asset management division, the single largest ETF manager, to BlackRock, Inc.)

The full report is available here and here.

(Editor’s Note: This post is based on a client memo by Randall Guynn, Arthur Long, Annette Nazareth, Margaret Tahyar, Robert Colby, Courtenay Myers and Reena Agrawal Sahni of Davis Polk & Wardwell LLP.)

The Obama Administration is currently on the legislative leg of the regulatory reform marathon that began earlier this year with the release of its Rules of the Road and continued with its White Paper on Financial Regulatory Reform. The Obama Administration released last week its legislative text to implement many elements of the White Paper. Overall, the Administration’s proposed legislation hews closely to the White Paper, though it provides important details in a number of areas where the White Paper was more general. The proposal would expand the Federal Reserve’s powers to include those of a systemic risk regulator, and create a new interagency Financial Services Oversight Council to assist the Federal Reserve in its new mission.

No sooner had the proposed legislation been released, however, than critics began to pull apart the proposals in commentary and through counterproposals. FDIC Chairman Sheila Bair criticized aspects of the proposal to appoint the Federal Reserve as systemic risk regulator, and SEC Chairman Mary Schapiro argued that a council of federal regulators, on which the SEC would have a seat, should have enhanced authority. The House Republicans proposed their own regulatory reform legislation, which contained a number of alternative proposals, including to limit the Federal Reserve’s authority to overseeing monetary policy, to transfer all of the Federal Reserve’s current regulatory authority to a new financial institutions regulator, and to fundamentally reform Fannie Mae and Freddie Mac. House Financial Services Committee Chairman Barney Frank argued that the federal thrift charter should not be abolished, even if the OTS were merged into the OCC in the form of a new national bank supervisor.

This memorandum, The Regulatory Reform Marathon, available here, builds on the analysis in our memorandum on the White Paper, A New Foundation for Financial Regulation?, by discussing the Obama Administration’s proposed legislation and the Republican counterproposal. Specifically, the memorandum discusses the Administration’s proposals for managing systemic risk, including the revised proposal for resolution authority and the proposal to designate certain large, systemically important financial companies as Tier 1 FHCs, subject to enhanced supervision and regulation by the Federal Reserve. The memorandum also discusses the Administration’s proposal to merge the OTS and the OCC, to eliminate the thrift charter, and to expand interstate branching; to expand bank and bank holding company regulation to include holding companies of insured depository institutions that have not otherwise been regulated as bank holding companies; and to enhance standards applicable to, and restrictions on, banks and bank holding companies. The memorandum also contextualizes other proposed regulatory enhancements, including the Administration’s proposal to give the Federal Reserve additional authority over payment, clearing and settlement systems and activities; the proposed reform of the asset-backed securitization markets; and the proposal to create an Office of National Insurance within the Treasury Department.

One way to sum up the “big picture” of corporate governance in the U.S. today is as follows:

We are in the midst of a true revolution in our private enterprise economic system, much of which is being driven in the name of “corporate governance” by multiple parties with an ever-expanding agenda.

This may sound like one of those deliberately extreme statements sometimes designed to stimulate debate—but I offer it simply as a description of where things are. In fact:

• The roster of participants in the U.S. corporate governance arena today is extraordinarily large and diverse, the collective agenda of these participants is very broad, and the level of dedication of these various participants to achieving their agendas is quite high.

• The common purpose or effect of their efforts is to redesign in significant ways the publicly traded business corporation, a central instrument of U.S. capitalism.

• This redesign involves sources of capital, the role of risk-taking, the fundamental purpose of business corporations and the role of directors.

The bottom line reality is that today’s corporate governance reform movement is reshaping materially our private enterprise economic system. Moreover, inadequate attention is being paid to assessing the scope and magnitude of the changes — and the risks they present to our economy. This inattention needs to be corrected promptly, before the law of unintended consequences produces considerable harm to our economic system in the name of “corporate governance.”

Participants in the Corporate Governance Universe Today

There is no question that the ranks of the participants in the corporate governance dialogue have been steadily expanding over the past decade, and as a result of the recent financial crisis and global recession, this has significantly accelerated in the past year or so. These participants now include: (1) the SEC; (2) the NYSE and Nasdaq; (3) shareholder governance activists; (4) hedge funds/other shareholders with shortterm or special economic interests; (5) public pension funds and other institutional investors; (6) corporate governance rating services; (7) proxy advisory firms; (8) academics in various disciplines; (9) labor unions; (10) the President/White House; (11) Congress; (12) the Treasury Department; (13) the Federal Reserve System; (14) the Federal Deposit Insurance Corporation; (15) the Department of Justice; (16) state Attorneys General; (17) the media; and (18) state corporate law (legislatures and courts).

Each of these parties or groups has become an active voice of corporate governance “reform.” The growth of this universe is a clear testament to the dramatically increased visibility and importance ascribed to “corporate governance” in today’s world.

…continue reading: U.S. Corporate Governance Today: A Reshaping of Capitalism