Posts Tagged ‘Ownership’

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

Governance and Comovement Under Common Ownership

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday November 12, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Alex Edmans, Professor of Finance at London Business School; Doron Levit of the Finance Department at the University of Pennsylvania; and Devin Reilly of the Department of Economics at the University of Pennsylvania.

Most existing theories of blockholder governance consider a single firm. However, in reality, many institutional investors hold blocks in multiple firms. In our paper, Governance and Comovement Under Common Ownership, which was recently made publicly available on SSRN, we study the implications of common ownership for corporate governance and asset pricing. In particular, we address two broad questions. First, does holding multiple blocks weaken governance by spreading a blockholder too thinly, as commonly believed? If not, under what conditions can multi-firm ownership improve governance? Second, can common ownership lead to correlation between stocks with independent fundamentals, and if so, in which direction?

…continue reading: Governance and Comovement Under Common Ownership

The Ownership of Japanese Corporations in the 20th Century

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday June 4, 2014 at 9:22 am
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Editor’s Note: The following post comes to us from Julian Franks, Professor of Finance at London Business School; Colin Mayer, Professor of Management Studies at Saïd Business School, University of Oxford; and Hideaki Miyajima, Professor of Commerce at Waseda University.

The Japanese insider ownership system began to fall apart approximately twenty years after it came into operation at the beginning of the 1970s. In our paper, The Ownership of Japanese Corporations in the 20th Century, which was recently made publicly available on SSRN, we suggest that the insider system emerged in the first place because the alternative institutions for promoting outside ownership failed. The problem was not with the legal framework, which was relatively strong in Japan. Instead, the failure was due to the absence of institutional reputational capital in equity markets equivalent to that embedded in the business coordinators and zaibatsu earlier in the century. The first point that this brings out is that the destruction of institutions, such as zaibatsu, can be serious in terms of economic performance. The second point is that the creation of new institutions of trust to replace previous institutions is complex and not readily achieved by design.

…continue reading: The Ownership of Japanese Corporations in the 20th Century

Do Ownership and Control Affect Firm Value?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday September 25, 2013 at 9:20 am
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Editor’s Note: The following post comes to us from Bang Dang Nguyen of Judge Business School at the University of Cambridge and Kasper Meisner Nielsen of the Department of Finance at Hong Kong University of Science & Technology.

In our paper, When Blockholders Leave Feet First: Do Ownership and Control Affect Firm Value?, which was recently made publicly available on SSRN, we investigate the effect of ownership and control on firm value, a longstanding question in finance, by employing the sudden death of large individual shareholders as a natural experiment. Our analysis focuses on stock price reactions to the deaths of individual blockholders who hold 5% or more in a U.S. listed firm. The main advantage of this approach is that sudden deaths are exogenous events that allow us to identify the impact of ownership and control on firm value. We analyze the value of inside and outside blockholders. Outside blockholders differ from insiders in that they are not actively involved in day-to-day management. We compare the magnitude of stock price reactions between inside and outside blockholders and note that any effect of ownership transition on firm value due to liquidity or anticipated takeover activity is likely to cancel out. The difference in the stock price reactions between inside and outside blockholders is therefore informative about the value of ownership and control.

Our study is the first to evaluate the effect of blockholders on firm value through the use of sudden deaths. In a related paper Slovin and Sushka (1993) analyze the event of death of blockholders. We draw a distinction between sudden and non-sudden deaths because entrenched blockholders are likely to hold onto their ownership until their deaths. Our concerns about entrenchment appears to be relevant as our findings show that stock price reactions are systematically more positive for non-sudden deaths than for sudden deaths. Using sudden death as opposed to non-sudden death is thus important for the interpretation of the effect of blockholders on firm value.

…continue reading: Do Ownership and Control Affect Firm Value?

Court: Private Equity Funds Potentially Liable for Portfolio Company Pensions

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday August 13, 2013 at 9:14 am
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Editor’s Note: The following post comes to us from Brian D. Robbins, Partner and the Head of the Executive Compensation and Employee Benefits Practice Group at Simpson Thacher & Bartlett LLP, and is based on a Simpson Thacher memorandum.

In December 2012, we published an Alert after a Federal District Court concluded that: (1) a private equity fund was not a “trade or business” for purposes of determining whether the fund could be liable under the Employee Retirement Income Security Act of 1974 (“ERISA”) for the pension obligations of one of its portfolio companies and (2) consequently, the private equity fund could not be liable for its portfolio company’s pension obligations under Title IV of ERISA, even if the fund and the portfolio company were part of the same “controlled group.” Our December Alert, which contains background on the issue and a summary of the state of the law through December 2012, may be found here. This post is to advise that the First Circuit Court of Appeals has reversed the 2012 Federal District Court opinion.

In Sun Capital Partners III LP v. New England Teamsters & Trucking Indus. Pension Fund (No. 12-2312, July 24, 2013), the First Circuit Court of Appeals has concluded that: (a) a private equity fund can be a “trade or business” for purposes of determining “controlled group” joint and several liability under ERISA and (b) as a result, the private equity fund could be held liable for the pension obligations of its portfolio company under Title IV of ERISA, if certain other tests are satisfied. Under ERISA, a “trade or business” within a “controlled group” can be liable for the ERISA Title IV pension obligations (including withdrawal liability for union multiemployer plans) of any other member of the controlled group. This “controlled group” liability represents one of the few situations in which one entity’s liability can be imposed upon another simply because the entities are united by common ownership, but in order for such joint and several liability to be imposed, two tests must be satisfied: (1) the entity on which such liability is to be imposed must be a “trade or business” and (2) a “controlled group” relationship must exist among such entity and the pension plan sponsor or the contributing employer.

…continue reading: Court: Private Equity Funds Potentially Liable for Portfolio Company Pensions

Piercing the Corporate Veil

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday July 5, 2013 at 9:26 am
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Editor’s Note: The following post comes to us from Michael Hutchinson, partner at Mayer Brown LLP, and is based on a legal update by Mr. Hutchinson and Martin Mankabady.

The Supreme Court’s decision in the case of Petrodel v Prest, handed down June 12, 2013, marks a crucial shift in the extent to which the courts will allow the “piercing of the corporate veil”. Although the case revolved around a matrimonial dispute, it has profound implications for corporate governance.

The Facts

In October 2011, the High Court ruled that Mrs Prest (“W”) was entitled to a divorce settlement of £17.5 million from Mr Prest (“H”), a wealthy oil trader. Since H failed to comply with court orders by failing to give full and frank disclosure of his finances during proceedings, his appeal was dismissed at a preliminary stage. The award therefore stood regardless of later court decisions concerning enforcement.

In terms of enforcement of the award, Moylan J ordered that properties in London and overseas, owned by Petrodel Resources and two other companies (collectively “X”) were assets of H and formed part of the divorce settlement since they were beneficially owned by H as the sole shareholder. Whilst Moylan J found there had been no impropriety in relation to X, so as to permit the corporate veil to be pierced, he nevertheless held that H, exercising complete control over X both in terms of their operation and management, was ‘entitled’ to the relevant properties within the meaning of s24(1)(a) Matrimonial Causes Act 1973 (“MCA”), despite not personally owning the assets.

X appealed to the Court of Appeal, submitting that in order for company assets to become subject to s24(1)(a) MCA, the corporate veil would have to be pierced and this only occurred in exceptional circumstances, this not being one of them.

…continue reading: Piercing the Corporate Veil

Who Cares? Corporate Governance in Today’s Equity Markets

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday May 14, 2013 at 9:50 am
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Editor’s Note: The following post comes to us from Mats Isaksson, the Head of Corporate Affairs, and Serdar Celik, Economist, both at the Organization for Economic Co-operation and Development (OECD).

There are two main sources of confusion in the public corporate governance debate. One is the confusion about the role of public policy in corporate governance. The other is a lack of empirical knowledge among commentators about the corporate landscape and the way that today’s stock markets influence the conditions for exercising long term and value creating corporate governance. This paper tries to mitigate some of this confusion and to increase awareness in both respects.

In terms of public policy it is important to understand that the general corporate governance discussion usually takes place on two different levels. And both are legitimate. One is concerned with the everyday workings of individual companies: how they organize their internal procedures, staff their company organs and build their corporate culture. Much of this is unique to the company in question. The choices to be made are often a matter of business judgment and are seldom in a domain where policy makers and regulators have any specific expertise.

…continue reading: Who Cares? Corporate Governance in Today’s Equity Markets

Corporate Governance and Value Creation

Posted by Viral Acharya, New York University, on Wednesday January 23, 2013 at 9:14 am
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Editor’s Note: Viral Acharya is a Professor of Finance at New York University.

In the paper, Corporate Governance and Value Creation: Evidence from Private Equity, forthcoming in the Review of Financial Studies, my co-authors (Oliver Gottschalg, Moritz Hahn, and Conor Kehoe) and I attempt to bridge two strands of literature concerning PE, the first of which analyzes the operating performance of acquired companies, and the second that analyzes fund IRRs. In addition, we investigate how human capital factors are associated with value creation in PE deals. We focus on the following questions: (i) Are the returns to equity investments by large, mature PE houses simply due to financial leverage and luck or market timing from investing in well-performing sectors, or do these returns represent the value created at the enterprise level in the so-called portfolio companies, over and above the value created by the quoted sector peers? (ii) What is the effect of ownership by large, mature PE houses on the operating performance of portfolio companies relative to that of quoted peers, and how does this operating performance relate to the financial value created (if any) by these houses? (iii) Are there any distinguishing characteristics based on the background and experience of PE houses or partners involved in a deal that are best associated with value creation?

…continue reading: Corporate Governance and Value Creation

(Why) Are US CEOs Paid More?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday December 10, 2012 at 8:54 am
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Editor’s Note: The following post comes to us from Nuno Fernandes, Professor of Finance at IMD Business School; Miguel Ferreira, Professor of Finance at Nova School of Business and Economics; Pedro Matos, Associate Professor of Business Administration at the University of Virginia, Darden School of Business; and Kevin Murphy, Professor of Finance at the University of Southern California, Marshall School of Business.

The high pay of U.S. CEOs relative to their foreign counterparts has been cited as evidence of excesses in U.S. executive compensation practices. This perception of a “pay divide” between the United States and the rest of the world is usually based on estimates provided by professional services firms like Towers Watson that receive a good deal of press coverage. However, attempts to understand the magnitude and determinants of the U.S. pay premium have been plagued by data limitations due to international differences in rules regulating the disclosure of executive compensation.

In our paper, Are U.S. CEOs Paid More? New International Evidence, forthcoming in the Review of Financial Studies, we use new data to compare CEO pay in 1,648 U.S. firms versus 1,615 firms from 13 foreign countries. Thanks to recently expanded disclosure rules, our sample includes publicly listed firms from both Anglo-Saxon and continental European countries that had mandated disclosure of CEO pay by 2006. It covers nearly 90% of the market capitalization of firms in these markets and, importantly, comprises firms with different corporate governance arrangements.

…continue reading: (Why) Are US CEOs Paid More?

SEC Legal Bulletin on Shareholder Proposals

Posted by Richard J. Sandler, Davis Polk & Wardwell LLP, on Thursday November 1, 2012 at 9:08 am
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Editor’s Note: Richard J. Sandler is a partner at Davis Polk & Wardwell LLP and co-head of the firm’s global corporate governance group. This post is based on a Davis Polk client memorandum.

The SEC recently issued Staff Legal Bulletin No. 14G providing additional guidance on shareholder proposals submitted to companies pursuant to Rule 14a-8. The guidance is in response to several issues that came up during the 2012 proxy season.

Proof of ownership

In a prior bulletin, SLB No.14F, the SEC had reconsidered its view as to who constitutes a “record holder” for purposes of Rule 14a-8 and indicated that only DTC participants may provide adequate proof of ownership for shareholder proponents. Consistent with its no-action letter decisions during 2012, the Staff indicated in this bulletin that it would also view ownership letters from affiliates of DTC participants as satisfying the proof of ownership requirement.

Also, the Staff indicated that a shareholder who holds securities through a securities intermediary that is not a broker or a bank can satisfy Rule 14a-8’s documentation requirement by submitting a proof of ownership letter from that securities intermediary. If the securities intermediary is not a DTC participant or an affiliate of a DTC participant, then the shareholder will also need to obtain a proof of ownership letter from the DTC participant, or an affiliate of the DTC participant, that can verify the holdings of the securities intermediary.

…continue reading: SEC Legal Bulletin on Shareholder Proposals

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