As the 2012 proxy season approaches, it appears that certain issues in board composition—the separation of the chairman and chief executive officer (CEO) roles (along with the related issue of the independence of the chairman) and board diversity—are likely to be more prominent this year. As boards consider these and other related corporate governance issues, directors should keep in mind that a corporate board is a complex creature, with company history, personal dynamics, and board structure all contributing to, or potentially undermining, the overall effectiveness of the board. No single factor in board composition will have the same significance at one company as it has at another; boards should seek to adopt best practices that will make them more effective, but this does not mean that governance structures such as the separation of chairman and CEO roles should be mandated. Directors facing pressure from activists should be counseled that it is the board’s right and responsibility to determine its own operation, and that it is the board’s duty to do so in a way that, in the business judgment of the directors, best serves the company and its shareholders.

…continue reading: Analyzing Aspects of Board Composition

This time last year appeared to hold the promise of increased deal activity, as a series of significant strategic deals were announced in the waning days of 2010 and fundamentals appeared to be aligned. That promise began to manifest itself in the opening months of the year, with several significant deals. As the year wore on, though, deal activity was dampened by several troubling environmental realities: an alarming sovereign debt and bank crisis in Europe, persistent U.S. monetary policy promising sustained low interest rates and a flat yield curve, a weak U.S. housing market and a tricky legal and regulatory landscape.

There were, though, some very bright spots. Leading the way were transformative deals by Comerica, Capital One and PNC. We also witnessed increasingly ambitious efforts by several stronger community banks to intelligently strengthen their franchises through successive smaller acquisitions in strategically important markets. Bank M&A in 2012 will likely remain episodic, as current ongoing business and regulatory conditions and weak equity market valuations will surely take more time to work through. Still, we should see a continued trend of stronger banks making selective, targeted acquisitions focused more on securing their long-term competitive positioning and maintaining balance sheet strength (and less on a short-term boost to quarterly earnings) as well as increasing pressure on smaller banks from several fronts to accept current valuations.

…continue reading: The Outlook for Bank M&A in 2012

The last ten years have seen a continuous increase in white collar criminal and regulatory enforcement activity. 2011 was no exception, and we expect the trend to continue in 2012.

While not an entirely new phenomenon, the world of white collar and regulatory enforcement appears more politicized than ever. Corporations facing investigations in 2012 can expect extensive press scrutiny, serial leaks about the investigation, and, on occasion, parallel involvement of Congress and others at any stage of the matter. The credit a company can expect to receive for providing cooperation seems ever more uncertain, especially in cases receiving a high level of public focus, notwithstanding government protestations that cooperation will be rewarded. And, it is likely to get harder going forward to shepherd corporate resolutions of these kinds of cases through this politicized landscape. There is no simple solution to these challenges. But, as we discuss below, it remains critical for companies responding to multipronged investigations to keep clear lines of communication open with government investigators, to address questions candidly and with integrity, to correct identified problems promptly, and to build upon and strengthen investments made before the inquiry began in establishing a culture of compliance.

…continue reading: White Collar and Regulatory Enforcement

Despite a sluggish year-end, overall deal activity in 2011 was strong, continuing the recovery from the post-crisis slump. In addition to strong overall volume (roughly $70 billion of deals), 2011 was impressive for its range of deals, from large-scale public-to-public mergers in the consolidating industrial and healthcare sectors, to major private-to-public acquisitions as private (often over-levered) assets and companies continued to undergo major ownership changes across many sectors, including distressed hotel and retail portfolios that were over-levered in the last cycle. There was even some leveraged opportunistic buying, at enterprise values much reduced from the peak, with credit windows opening for brief periods on a spot basis depending on the deal and buyer involved.

While the uncertainty caused by the European crisis and other economic conditions has created a wait-and-see attitude in many boardrooms, our sense is that things are warming up and that the conditions that generated impressive deal volume in the first half of 2011 will again drive a healthy volume of deals in 2012. Many boards and CEOs who hit “pause” in the last few months have their fingers hovering over the “play” button, ready for action when the time is right on the lineup of deals that have been percolating for some time. The balance sheets of most of the larger REITs remain strong, dry powder is still plentiful, and opportunities continue to arise, especially given the low supply of new development product, strong investor appetite, and the distressed pools possibly coming on line as the first big wave of pre-financial crisis 2007 debt matures in 2012.

We list below some themes and issues we are keeping an eye on as 2012 begins:

…continue reading: REIT and Real Estate M&A and Restructurings

As we enter 2012 and as the U.S. economy continues to stabilize, there appears to be a growing sense of optimism about further recovery in the M&A market. During the first half of 2011, the M&A market continued a resurgence that began in the latter part of 2010, with higher aggregate deal value than had been seen since before the financial crisis. Though worldwide M&A activity declined in the second half of 2011, reflecting uncertainties regarding the volatile global financial climate, it has continued at a relatively strong pace, and a number of significant transactions have recently been announced, including Kinder Morgan’s $38 billion acquisition of El Paso, United Technologies’ $18 billion acquisition of Goodrich, and Gilead’s $11 billion acquisition of Pharmasset.

…continue reading: Mergers and Acquisitions in 2012

With the phase out of Tier 1 capital treatment for trust preferred securities (TruPS) mandated by Dodd Frank slated to begin January 1, 2013, financial institutions have been active in considering potential strategies to replace outstanding TruPS with other forms of regulatory capital. Last week, Huntington Bancshares completed a novel exchange offer for several specified series of outstanding TruPS. In the offer, Huntington exchanged outstanding floating-rate TruPS for a new series of floating-rate non-cumulative perpetual preferred stock, which – unlike the TruPS – will not lose Tier 1 treatment under Dodd Frank and will also continue to be recognized as a Tier 1 instrument under Basel III.

Huntington’s exchange offer involved four different series of TruPS and the offer was tailored to each series, including through the use of additional cash consideration for two of the series and by employing a waterfall of acceptance priority levels among the four series in the event that the offering was oversubscribed. By conducting the exchange as a registered offering rather than relying on the exchange provisions under Section 3(a)(9) of the Securities Act of 1933, Huntington was able to employ a dealer manager to solicit TruPS holders in an effort to maximize participation. Note, however, that while Huntington’s exchange offer was completed in the scheduled time frame, the SEC must declare an exchange offer registration statement effective prior to closing, and the SEC review process can risk a delayed closing. Under the securities laws, the offer must be open to all holders and must remain open for at least 20 business days.

…continue reading: Creative TruPS Capital Restructurings

Here are slides on the Airgas case and slides on the underlying gating issue of long/short term perspective that drives much of the corporate governance debates and is rarely confronted by the “governistas” that advocate all sorts of standardized practices they consider to be value enhancing. I used these materials this month in a class co-taught by Lucian Bebchuk and Scott Hirst at Harvard Law School – hence, the reference to being “in the belly of the beast.” The slides are available here and here.

We have long eschewed the one-size-fits-all model of corporate governance advanced by many of the proxy advisory firms (see, for example, our memo of October 19, 2010). The formulaic voting policies sold by many of these proxy advisory firms represent a low-cost means by which many institutional shareholders seek to discharge their proxy voting responsibilities. Unfortunately the voting policies of the proxy advisory firms are usually derived from unsupported notions of what constitutes “good governance” and are often applied in ways that do not account for the specific circumstances at many companies. Accordingly, this approach often fails to advance the real interests of long-term investors. The Department of Labor and the Securities and Exchange Commission have raised questions regarding fiduciary responsibility in the context of the outsourcing of proxy voting decisions to proxy advisory firms, but no regulatory changes to address this issue have yet been adopted.

…continue reading: Disintermediating the Proxy Advisory Firms

Companies looking ahead to the 2012 proxy season should be aware of the recently updated corporate governance policies of Institutional Shareholder Services (ISS). [1] While maintaining its formal policy of issuing “case-by-case” evaluations in many areas, ISS has issued numerous revisions of prior policies as well as new policies on certain types of shareholder proposals that had not been previously addressed. The key areas of interest for companies preparing for 2012 are likely to be proxy access, say-on-pay, pay-for-performance, and risk oversight.

Proxy Access

Shareholder proposals on proxy access are likely to be a topic of importance next year due to the Securities and Exchange Commission’s (SEC) amendment to Rule 14a-8, effective September 20, 2011. The rule now provides that companies may not exclude proposals for proxy access procedures from their proxy statements on the basis that they relate to the nomination or election of directors. Proponents must meet the current eligibility requirements of Rule 14a-8, which require that the shareholder have owned at least the lesser of $2,000 in market value, or 1 percent, of company shares for at least one year. (Companies may, of course, ask for noaction relief from the SEC to exclude such proposals on other grounds. [2])

…continue reading: The ISS 2012 Policy Updates: Another View of the Cathedral

In a decision troublesome to the business community, the New York Court of Appeals has now determined that the New York Martin Act does not preempt private plaintiff lawsuits based solely upon traditional common-law causes of action such as negligence and breach of fiduciary duty — even where there may be overlap with statutory claims reserved to the New York Attorney General. From the fact that the Act itself had been held years ago not to give rise to a private cause of action, numerous rulings from both New York State and Federal courts held that the Act preempted non-fraud common-law tort claims. Deeming itself unable to find anything in either the text of the statute or its legislative history that would support such preemption, the Court affirmed a more recent ruling by the Appellate Division, First Department, and ruled the doctrine out. Assured Guarantee (UK) Ltd. v. J.P. Morgan Investment Management Inc., No. 227 (N.Y. Dec. 20, 2011).

In doing so, the Court nevertheless reaffirmed its prior rulings that the Martin Act itself creates no private right of action and that preemption would continue to exist where the claim is entirely dependent upon a violation of the Martin Act or its implementing regulations, including certain specific real estate provisions that are part of the Act.

…continue reading: The Martin Act and Common-Law Claims