For the last decade, governance issues have been a priority at public companies and companies planning to go public. Recent joint venture activity reflects a carryover from the public company arena of this intense focus on improving governance. Venture partners are increasingly concentrating on developing and implementing governance best practices within their joint venture vehicles. This client alert provides a brief discussion of recent trends in joint venture governance.

Use of Public Company Governance Practices in Joint Ventures

Many joint venture planners are using or adapting governance practices developed by public companies to address public company governance concerns, including the following:

…continue reading: Recent Trends in Joint Venture Governance

The past year has been one of change and challenge for public companies and their boards, as companies have moved to implement “say-on-pay” and other provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). With the 2012 proxy season on the horizon, public companies and their directors will continue to feel the impact of Dodd-Frank as the Securities and Exchange Commission (“SEC”) proceeds with its ongoing efforts to implement the law. At the same time, public companies and their boards are operating in an environment where the balance of power between boards and shareholders continues to shift. The traditional, board-centric model of corporate governance continues to gravitate toward a paradigm that includes an increased role for shareholders. Activist shareholders are seeking greater participation in companies’ governance and operations, and they are exerting increased pressure on companies to adopt so-called corporate governance “best practices.”

…continue reading: Considerations for Public Company Directors in the 2012 Proxy Season

On December 14, 2011, the FTSE Group published the results of its market consultation on the minimum free float [1] requirements for inclusion of premium London-listed companies [2] in the FTSE UK Index Series – one of the most recognized indices in the world, which includes the FTSE 100 Index. The key outcome of the consultation is that, as of January 1, 2012, the minimum free float required for UK-incorporated companies will increase from 15% to 25%, with grandfathering of existing FTSE companies until January 1, 2014.

I. Current Free Float Requirements

Under the FTSE Ground Rules, companies that wish to be included in the FTSE UK Index Series must maintain a minimum free float:

• of at least 50%, if not incorporated in the UK; or
• of at least 15% (or 5% where the relevant company’s market capitalization exceeds US $5 billion), if incorporated in the UK.

…continue reading: FTSE Announces Change to Minimum Free Float Requirements

During 1980-2000, an average of 311 companies per year went public in the U.S. Since the technology bubble burst in 2000, the average has been only 102 initial public offerings (IPOs) per year, with the drop especially precipitous among small firms. Many have blamed the Sarbanes-Oxley Act of 2002 and the 2003 Global Settlement’s effects on analyst coverage for the decline in U.S. IPO activity. In our paper, Where Have All the IPOs Gone?, which was recently made publicly available on SSRN, we introduce a new explanation for the prolonged low level of U.S. IPO volume. We posit that there has been a structural change in the U.S. IPO market, driven by structural shifts in the economy that have reduced the profitability of small companies, whether public or private. Our analysis is based on the technological determinants of the optimal scale of the firm in a dynamic environment, where profitable growth opportunities may be lost if they are not quickly seized. We posit that many small firms can create greater operating profits by selling out in a trade sale (being acquired by a firm in the same or a related industry) rather than remaining as an independent firm. Earnings will be higher as part of a larger organization that can realize economies of scope and bring new technology to market faster.

…continue reading: Where Have All the IPOs Gone?

The focus on the performance of corporate boards prompts a revisiting of what is expected from the board of directors of a major public company – not just the legal rules, but also the aspirational “best practices” that have come to have almost as much influence on board and company behavior.

Boards are expected to:

• Establish the appropriate “Tone at the Top” to actively cultivate a corporate culture that gives high priority to ethical standards, principles of fair dealing, professionalism, integrity, full compliance with legal requirements and ethically sound strategic goals.
• Choose the CEO, monitor his or her performance and have a detailed succession plan in case the CEO becomes unavailable or fails to meet performance expectations.
• Work with management to navigate the dramatic changes in economic, social and political conditions, in order to remain competitive and successful.

…continue reading: The Spotlight on Boards

The 2005 split-share reform allowed for restricted stocks worth hundreds of billions of dollars to become tradable over a short period, sharply increasing liquidity in the Chinese stock market. In our paper, Is the Stock Market Just a Side Show? Evidence from a Structural Reform, which was recently made publicly available on SSRN, we use this episode as a way to flesh out links between stock market activity and real business activity.

We evaluate the impact of the 2005 reform exploiting various institutional features associated with its implementation. One of such feature is a pilot experiment conducted at the beginning of the reform schedule. Another is the gradual, large-scale share conversion that took place within a 16-month window. These features are unique and present both opportunities and challenges for our empirical tests. It is possible, for example, that better-managed firms were chosen to participate in the pilot trial that initiates the conversion program because of political motivation to showcase the reform. In addition, after the pilot stage, firms were free to join the reform at the time of their choosing. Thus, the treatment assignment might also be endogenous due to self-selection. To minimize these concerns, our analysis employs quasi-experimental methods that make the outcome variation before and after conversion conditionally independent from the compliance date.

…continue reading: Is the Stock Market Just a Side Show?

In the paper, Do Institutional Investors Influence Capital Structure Decisions?, which was recently made publicly available on SSRN, we analyze whether institutional holdings influence capital structure decisions, and whether firms’ financial leverage affects institutional investors’ decisions to hold their equity. Theories of capital structure imply that firms choose their leverage in response to market frictions such as agency costs and asymmetric information. Meanwhile, institutional monitoring and information-gathering affect firms’ agency costs and information environment, opening channels through which institutions may influence firms’ choices of leverage. In the agency framework, institutional investors serve as an external disciplinary mechanism for management, lessening the need for internal disciplinary mechanisms such as debt. In the asymmetric information framework, institutional investors decrease information asymmetry between outside and inside shareholders, which reduces the adverse selection costs of equity and lowers the cost of equity relative to debt, serving to decrease the amount of debt needed for a separating signaling equilibrium.

…continue reading: Do Institutional Investors Influence Capital Structure Decisions?

The U.S. Court of Appeals for the Sixth Circuit has affirmed a District Court judgment holding an interloper that breached its standstill agreement liable for tortious interference to the winning bidder in an auction. The interloper is required to pay the winner the incremental amount – over $100 million – that it took to secure shareholder approval for its deal, and may also be liable for punitive damages. In addition to providing important guidance on tortious interference claims in the M&A context, the case offers useful reminders for buyers, sellers and would-be over-bidders in the art of running, winning and “topping” an auction for a public company.

The case stems from a four-year old transaction in which, after our client Ventas won an auction to buy Sunrise REIT, losing bidder Health Care Property Investors (“HCP”) went public with a topping bid at a 20% premium, even though this was prohibited by its standstill agreement with the target. The public announcement of the topping bid did not disclose that it was conditional or that it violated the standstill. Ventas demanded that Sunrise REIT enforce HCP’s standstill agreement as required by the merger agreement. Both the Ontario trial and appellate courts ordered Sunrise REIT to do so, upholding a selling board’s prerogative to structure an auction in a manner that the board believes will maximize shareholder value (including by requiring “best and final” offers from participants and agreeing to enforce a standstill obligation against a losing bidder).

…continue reading: Sixth Circuit Upholds Tortious Interference Verdict Against Auction Loser’s Overbid

How did the Romans finance capital-intensive endeavors such as the erection of temples, the pavement of roads, or the trading of goods from foreign countries? This question has fascinated generations of classical readers and scholars. It is, however, also of interest to the corporate lawyer of today, because Ancient Rome helps us better understand the functions of corporate law and its role within the broader economic, social, political, and legal setting.

What We Know About Ancient Rome

For more than 175 years, historians, economists, and lawyers have speculated or even claimed that, as early as the Roman Republic (6th to 1st century BC), businessmen formed large firms with publicly traded shares similar to modern stock corporations (since Orelli, 1835). Most recently, a longer Journal of Economic Literature article argues that there was evidence for such an “early form of shareholder company” (Malmendier, 2009).

In a new book, however, I conclude that such claims are unwarranted. [1] I consider all legal and literary sources, both in Latin and classical Greek, that have come down to us, such as the works of Polybius (2nd century BC), Cicero (1st century BC), Livy (around the time of Christ’s birth), Pliny the Elder (1st century AD), or Plutarch (2nd century AD), as well as great collections like the New Testament (1st/2nd century AD) or the Digest (6th century AD). None of these sources brings to light evidence for larger “capital associations” (my term for entities that helped finance projects which, on account of their scope, duration or risk, exceeded the capacity of single individuals), let alone associations with publicly traded shares.

…continue reading: Corporate Law Lessons from Ancient Rome

In the paper, Firm Mortality and Natal Financial Care, which was recently made publicly available on SSRN, we ask three related questions about the survival of U.S. public firms in the 1985 to 2006 period. First, what is their death rate as a function of age after their initial public offerings (IPOs)? Second, do financial intermediaries in the IPO process affect this death rate function? Third, if they do, how?

To address the first question, we adopt the econometrics from the actuarial sciences and construct a mortality table for U.S. public companies during 1985–2006. Following Queen and Roll (1987), we classify births of public companies as their appearance on the Center for Research in Security Prices (CRSP) tape, and deaths as their disappearance from the CRSP tape. We focus on bad deaths (liquidation, delisting, permanent trading halts) rather than good deaths (e.g., mergers and takeovers), since bad deaths incur substantial economic and social welfare costs. The mortality rate table reveals that the death rates of U.S. public firms increase with age, peak at three years at a level three times higher than the long-term mortality rate, and then decrease with age. This finding is an important contribution in its own right, because the mortality literature in the economics of industrial organization notes that survival risk decreases as a firm ages. With mortality rates first increasing and then decreasing, we are the first to document that U.S. public firms have to survive up to three years after their IPO—the critical age—before the survival risk starts diminishing.

…continue reading: Firm Mortality and Natal Financial Care