Posts Tagged ‘Controlling shareholders’

Executive Compensation in Controlled Companies

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday November 13, 2014 at 9:12 am
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Editor’s Note: Kobi Kastiel is a fellow at the Harvard Law School Program on Corporate Governance. His article, Executive Compensation in Controlled Companies, is forthcoming in the January 2015 issue of Indiana Law Journal and available here. Additional work from the Program on Corporate Governance on executive compensation includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried, discussed on the Forum here.

More than a decade ago, Professors Lucian Bebchuk and Jesse Fried published the seminal work on the role and significance of managerial power theory in executive compensation. Their work cultivated a vivid debate on executive compensation in companies with dispersed ownership. The discourse on the optimality of executive pay in controlled companies, however, has been more monolithic. Conventional wisdom among corporate law theorists has long suggested that the presence of a controlling shareholder should alleviate the problem of managerial opportunism because such a controller has both the power and incentives to curb excessive executive pay.

My Article, Executive Compensation in Controlled Companies, forthcoming in the Indiana Law Journal, challenges that common understanding by proposing a different view that is based on an agency problem paradigm, and by presenting a comprehensive framework for understanding the relationship between concentrated ownership and executive pay. On the theoretical level, the Article shows that controlling shareholders often have incentives to overpay professional managers instead of having an arm’s-length contract with them, and therefore it suggests that compensation practices in a large number of controlled companies may have their own pathologies.

…continue reading: Executive Compensation in Controlled Companies

Controlling Stockholders in Delaware—More Than a Number

Editor’s Note: Daniel Wolf is a partner at Kirkland & Ellis focusing on mergers and acquisitions. The following post is based on a Kirkland memorandum by Mr. Wolf and David B. Feirstein. 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.

Two recent Chancery Court decisions, Crimson Exploration and KKR Financial, confirm that Delaware takes a flexible and fact-specific approach to determining whether a stockholder is deemed to be “controlling” for purposes of judicial review of a transaction. It is important for dealmakers to understand when the courts may make a determination of control, both to properly craft a defensible process and to understand the prospects for resulting deal litigation.

…continue reading: Controlling Stockholders in Delaware—More Than a Number

Delaware Court Dismisses Action Against Seller’s Directors and Financial Advisor

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday November 7, 2014 at 9:02 am
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Editor’s Note: The following post comes to us from Jason M. Halper, partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP, and is based on an Orrick publication by Mr. Halper, Peter J. Rooney, and Natalie Nahabet. 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.

On October 24, 2014, the Delaware Court of Chancery issued a decision, In Re: Crimson Exploration Inc. Stockholder Litigation, addressing when: (i) a stockholder with less than majority voting power may be deemed a controlling stockholder, and (ii) the controlling stockholder’s actions trigger “entire fairness” review of a challenged merger. The court also rejected criticisms of the seller’s financial advisor based on supposed conflicts of interest and flawed valuation methodologies.

The decision provides important guidance for directors and their advisors in merger transactions where one stockholder or a cohesive group of stockholders holds a sizable share of company stock.

…continue reading: Delaware Court Dismisses Action Against Seller’s Directors and Financial Advisor

Alibaba’s Governance Risks

Posted by Lucian Bebchuk, Harvard Law School, on Tuesday September 16, 2014 at 3:03 pm
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Editor’s Note: Lucian Bebchuk is William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance, Harvard Law School.

Wall Street is eagerly watching what is expected to be one of the largest initial public offerings (IPOs) in history: the offering of the Chinese Internet retailer Alibaba at the end of this week. Investors have been described by the media as “salivating” and “flooding underwriters with orders.” It is important for investors, however, to keep their eyes open to the serious governance risks of investing in Alibaba.

In a New York Times DealBook column, posted today, I analyze these governance risks. I show that Alibaba’s ownership structure does not provide adequate protections to public investors. In particular, such investors should worry that, over time, a significant amount of the value created by Alibaba would not be shared with them. Investors participating in the IPO, I conclude, should recognize the significant governance risks they will be taking.

The column, Alibaba’s Governance Leaves Investors at a Disadvantage, is available here.

UK Proposed Register of Individuals with Significant Control over Non-Public Companies

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday August 2, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Wayne P.J. McArdle, Partner in the London office of Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn alert by Mr. McArdle, James Barabas, and Edward A. Tran.

On June 25, 2014, the UK Government published the Small Business, Enterprise and Employment Bill [1] which, among other things, proposes that all UK companies (other than publicly traded companies reporting under the Disclosure and Transparency Rules (DTR5)) be required to maintain a register of people who have significant control over the company. The Bill is part of the UK Government’s initiative to implement the G8 Action Plan to prevent the misuse of companies and legal arrangements agreed at the Lough Erne G8 Summit in June 2013, which we discussed in our client alert entitled “Through the Looking Glass: The Disclosure of Ultimate Ownership and the G8 Action Plan” (June 20, 2013). [2] In broad terms, the G8 Action Plan is designed to ensure the integrity of beneficial ownership and basic company information and the timely access to that information by law enforcement and tax authorities.

…continue reading: UK Proposed Register of Individuals with Significant Control over Non-Public Companies

Delaware Legislature Clarifies Section 251(h) Second-Step Merger Provisions

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday August 1, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Abigail Pickering Bomba, partner in the corporate practice at Fried, Frank, Harris, Shriver & Jacobson LLP, and is based on a Fried Frank publication by Ms.Bomba, David N. Shine, John E. Sorkin, and Gail Weinstein. 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.

The following amendments to Delaware General Corporation Law (“DGCL”) Section 251(h) have been passed by the Delaware legislature, clarifying a number of issues that have arisen since adoption of the law last year. If signed by the Governor (as is expected), the amendments will apply to merger agreements entered into on or after August 1, 2014. Under Section 251(h), a merger agreement can include a provision that eliminates the need for a target stockholder vote for a merger after a tender or exchange offer if, among other conditions, the acquiror then owns at least the number of shares that would be sufficient to approve the merger under the DGCL and the target’s charter. The amendments provide for the following:

…continue reading: Delaware Legislature Clarifies Section 251(h) Second-Step Merger Provisions

Delaware Court Declines to Dismiss Class Action Challenging Going-Private Transaction

Editor’s Note: Allen M. Terrell, Jr. is a director at Richards, Layton & Finger. This post is based on a Richards, Layton & Finger publication, and 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 Hamilton Partners, L.P. v. Highland Capital Management, L.P., C.A. No. 6547-VCN, 2014 WL 1813340 (Del. Ch. May 7, 2014), the Court of Chancery, by Vice Chancellor Noble, in connection with a challenge to a going-private transaction whereby American HomePatient, Inc. (“AHP”) was acquired by an affiliate of one of its stockholders, Highland Capital Management, L.P. (“Highland”), refused to dismiss breach of fiduciary duty claims against Highland. The Court held that, for purposes of defendants’ motion to dismiss, plaintiff alleged facts sufficient to support an inference that Highland, which owned 48% of AHP’s stock and 82% of AHP’s debt, was the controlling stockholder of AHP and that the merger was not entirely fair.

…continue reading: Delaware Court Declines to Dismiss Class Action Challenging Going-Private Transaction

Enhancing the Effectiveness of the UK Listing Regime—Implementation

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday June 1, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Simon Witty, partner in the corporate department at Davis Polk & Wardwell LLP, and is based on a Davis Polk client memorandum by Mr. Witty, Will Pearce, Dan Hirschovits, and Victoria Kershaw.

Significant new rules to strengthen the UK premium listing regime have come into force today (The Listing Rules (Listing Regime Enhancements) Instrument 2014). The rules have been the subject of two rounds of consultation by the UK Financial Conduct Authority (“FCA”) and are designed in particular to improve the governance of premium listed companies with a controlling shareholder. Feedback on the responses received has also been published today by the FCA (PS14/8: Response to CP13/15—Enhancing the effectiveness of the Listing Regime).

We summarise the main elements of the new regime below, which are largely as proposed by the FCA in its previous consultation document (see our Client Memorandum dated November 7, 2013). Companies contemplating a premium listing will need to consider the new rules as part of their IPO process and, over the coming months, existing premium listed companies with controlling shareholders will need to implement a number of new measures to comply with the new rules.

…continue reading: Enhancing the Effectiveness of the UK Listing Regime—Implementation

Regulation and Self-Regulation of Related Party Transactions in Italy

Editor’s Note: The following post comes to us from Luca Enriques, Professor of Business Law at LUISS University (Rome). The post is based on a paper co-authored by Professor Enriques, and Marcello Bianchi, Angela Ciavarella, Valerio Novembre and Rossella Signoretti of CONSOB (Commissione Nazionale per le Societa e la Borsa).

Agency problems and tunneling are traditional features of corporate governance in Italy. Where ownership is concentrated, dominant shareholders have both the incentives and the means to monitor managers but they may also extract private benefits through self-dealing transactions that favor the related party at the expense of minority shareholders. Pyramids and other control enhancing mechanisms (CEMs) make minorities more vulnerable to abusive self-dealing. The regulatory environment proved to be too lax. The late 1990s reforms failed to specifically address conflicts of interests in listed companies. Further, as a result of the 2003 corporate law reform, directors are allowed to vote even if their interests conflict with those of the firm and parent companies within integrated groups may legitimately force subsidiaries into possibly harmful transactions, provided some procedural and substantial requirements are met. With the exception of corporate governance codes, no specific new rule addressed the fairness of related party transactions (RPTs).

…continue reading: Regulation and Self-Regulation of Related Party Transactions in Italy

Do Freezeouts Affect the Performance of the Controlling Shareholder?

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday May 9, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Fernan Restrepo of Stanford Law School.

Some works in the literature on mergers and acquisitions suggest that mergers do not generate any efficiency for the acquirer and that, in fact, they have a negative effect on operating performance. This work examines whether freezeouts (that is, transactions in which a controlling shareholder acquires the remaining shares of a corporation for cash or stock) also produce a negative effect on the performance of the acquirer.

On a theoretical level, there are legitimate reasons to think that freezeouts should not generate any significant efficiency for the controlling shareholder, especially because, after completing the deal, he maintains control over the same assets he was already controlling before. From this perspective, the only gain arising from a freezeout is the savings in regulatory costs associated with the public status of the target, without much room for significant synergies. Moreover, it is possible that the reduction in public monitoring of the target that results from a freezeout could not only translate into long-term losses for that company, but also affect negatively the controlling shareholder in an indirect way. In this sense, a freezeout could actually be expected to lead to drops in the controlling shareholder’s operating performance.

…continue reading: Do Freezeouts Affect the Performance of the Controlling Shareholder?

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