Recently, in the Mergers, Acquisitions, and Split-Ups course here at Harvard Law, co-taught by Professor Robert Clark and Vice Chancellor Leo Strine, Jr., practitioners from three major hedge funds gave a fascinating talk on the complex legal matters facing funds that take activist positions in publicly traded companies. The panel discussion, entitled Hedge Fund Activism, provided considerable practical insight on the range of regulatory, competitive, and political issues a fund manager must consider before participating actively in a contested election.

The panelists, including William Ackman and Roy Katzovicz of Pershing Square Capital, Sy Lorne of Millennium Partners, and Robert Knapp of Ironsides Partners, emphasized the regulatory risks hedge fund activists face–especially the antitrust and securities issues raised when a fund enters a proxy fight. The talk also addressed the effects of public perception of hedge funds and increased use of derivatives on fund activism. In addition, the panelists shared their insights on the complex voting issues that inevitably arise in a closely contested election–including which shareholders should have been entitled to vote, and which party should have prevailed.

A video of the discussion can be accessed online here.

Our firm has recently released a new M&A Commentary providing strategic analysis of the increasingly common phenomenon of shareholder resistance to the terms of proposed acquisitions. The Commentary, entitled Shareholder Pushback on M&A Deals, explains how several high-profile mergers were rebuffed by shareholders in 2007–including Carl Icahn’s attempted purchase of Lear.

The Commentary emphasizes the importance in this environment of obtaining a positive recommendation from ISS, and of the board’s flexibility in the timing of the shareholder merger vote under Mercier v. Inter-Tel. Where those strategies fail, however, the Commentary points out that acquirers may wish to reconsider the once-dominant two-step tender approach. The Commentary concludes:

“Although the risk of shareholder pushback against announced M&A deals may be receding as the M&A market softens, it is not going away. In light of this added execution risk, parties negotiating a merger should structure the transaction to minimize it to the extent feasible. One readily available way to do this is to use a two-step transaction structure consisting of a tender offer followed by a merger, instead of a traditional one-step merger. The two-step transaction was at one time the prevailing deal structure, and it should become so again.”

The full Commentary is available online here.

Recently, in the Mergers, Acquisitions, and Split-Ups course here at Harvard Law, co-taught by Professor Robert Clark and Vice Chancellor Leo Strine, Jr., two expert practitioners shared their insights on the complex cross-border transactions that increasingly define the M&A landscape. While the panelists provided guidance on the economic reasoning underlying cross-border deals, the discussion also featured fascinating perspectives on the social and political considerations that accompany most major international mergers.

The panelists included Richard Hall of Cravath, Swaine & Moore along with Scott V. Simpson of Skadden, Arps, Slate, Meagher & Flom, each of whom have served as counsel on some of the largest cross-border deals ever to close. The panelists took students through case studies of two recent cross-border deals that illustrate the sensitive issues that corporate counselors face in a major international merger: Mittal Steel’s acquisition of Arcelor, and Basell’s acquisition of Huntsman. The panelists offered an insider’s view of the negotiations in both transactions–and the social and political matters that inevitably arise when a foreign acquirer pursues a large target.

A video of the discussion can be accessed online here.

(Editor’s Note: This post comes to us from Jie Cai and Ralph A. Walkling of Drexel University.)

We have recently released a new paper entitled Shareholders’ Say on Pay: Does it Create Value? The paper examines stock returns around the time of the passage of the Say on Pay Bill in the House of Representatives in search of evidence whether the market views the legislation as creating value. The Abstract of the piece follows:

The post Sarbanes-Oxley Act period is associated with several initiatives designed to give shareholders a greater voice in the boardroom. The latest of these initiatives is the Say-on-Pay Bill (H.R. 1257) which passed the House of Representatives on April 20, 2007 by a 2 to 1 margin. This bill does not limit CEO pay but requires an advisory shareholder vote on executive compensation packages. Using the abnormal return of 1,245 firms surrounding the House passage of this bill, we examine whether the market interprets shareholders’ say on executive pay as adding or subtracting firm value. Stocks of firms with positive abnormal CEO compensation react in a significant, positive manner to the Say-on-Pay Bill. The positive market reaction is stronger among the firms with weaker, but not the weakest governance. In addition, abnormal returns are higher in the subset of firms more likely to receive higher disapproval votes from shareholders and firms more likely to implement changes under the pressure of shareholder votes. Thus, the bill has the greatest impact among the subset of firms most likely to benefit and implement changes. Given the uncertainty surrounding passage, implementation and efficacy of this proposed advisory vote, the results are likely to understate the actual impact of Say on Pay legislation. Our findings suggest that the market views this legislation as value-creating for the companies where it is likely to have the most impact. These results provide important evidence for the current debate regarding the Say-on-Pay legislation in Congress and shareholder access to proxy. Our results also shed light on the role of activist investors.

The full Article is available for download here.

Recently, the Mergers, Acquisitions, and Split-Ups course here at Harvard Law School, co-taught by Professor Robert Clark and Vice Chancellor Leo Strine, Jr., hosted a fascinating talk by Martin Lipton of Wachtell, Lipton, Rosen & Katz, entitled The Future of M&A. The audience was treated to a rare glimpse of the events that have shaped mergers for a generation through the eyes of one of the principal architects of modern corporate law.

The talk began with an intimate history of the developments that led to the conception of modern merger defenses. The students were treated to the definitive account of the development of the shareholder rights plan–more widely known as the “poison pill”–as well as the strategy that led to the successful defense of those measures before the Delaware courts. Questions from the audience led to an insightful discussion of changes in modern corporate governance–including shareholder activism, the increased presence of independent directors, and the prominence of private equity–and their effects on merger practice. The talk closed with an insider’s view on recent developments likely to shape merger practice in 2008 and beyond.

A video of the discussion can be accessed on the Program on Corporate Governance website here. The materials used in the presentation can be downloaded here.

Unfortunately, my friend Lynn Turner prefers invective to analysis. From his comments, I see no evidence that he has in fact read the Second Circuit’s AFSCME v. AIG decision, Chairman Cox’s statement, or the interpretive rule actually adopted by the Commission on November 28.

Lynn states that Chairman Cox should have “voted with” departing Commissioner Nazareth on November 28. That would have produced a deadlock and resulted in no Commission position at all in response to the Second Circuit panel opinion. While those who love the playground of press releases and posturing, and have no current responsibility to administer the laws, might think such an abdication was just the right thing, Chairman Cox and the Commission majority chose to take their responsibilities seriously.

Lynn and the other constantly carping critics will be eating crow next Spring when Cox, with two new Democratic Commissioners in place, puts proxy access back on the agenda and again seeks consensus. If Lynn and other vocal activists really wanted proxy access, they would begin working with Chairman Cox and Corporation Finance Director White now to develop a proposal that could garner majority Commission support.

It appears that instead the critics and their academic enablers prefer to glorify those who have left the field and aim demagogic attacks at the Chairman. Great press . . . but no proxy access for another two proxy seasons. That’s nothing to brag about.

The Program on Corporate Governance has recently issued as a discussion paper my piece, co-authored with Zvika Neeman, entitled Investor Protection and Interest Group Politics. We develop in this paper a framework for analyzing how interest group politics influence investor protection levels. Our analysis identifies factors that impede desirable corporate governance reforms, and can help explain the ways in which investor protection levels vary around the world and over time. The abstract of the paper is as follows:

We model how lobbying by interest groups affects the level of investor protection. In our model, insiders in existing public companies, institutional investors (financial intermediaries), and entrepreneurs who plan to take companies public in the future, compete for influence over the politicians setting the level of investor protection. We identify conditions under which this lobbying game has an inefficiently low equilibrium level of investor protection. Factors that operate to reduce investor protection below its efficient level include the ability of corporate insiders to use the corporate assets they control to influence politicians, as well as the inability of institutional investors to capture the full value that efficient investor protection would produce for outside investors. The interest that entrepreneurs (and existing public firms) have in raising equity capital in the future reduces but does not eliminate the distortions arising from insiders’ interest in extracting rents from the capital public firms already have. Our analysis generates testable predictions, and can explain existing empirical evidence, regarding the way in which investor protection varies over time and around the world.

The full paper is available for download here.

It appears Mr. Olson is sadly uninformed when–in my opinion–he inappropriately labels former Securities and Exchange Commissioner Roel Campos as a “villain” for his role in the SEC rulemaking on proxy access.

Indeed, after the Second Circuit’s decision in AIG, it was Commissioner Campos who brought various parties together in an attempt to bridge the gap that existed between investors and management. Unfortunately, this issue had taken on an emotional, almost fundamentalist tone driven more by political ideals than by common sense. When battle lines were drawn and after the SEC proposed two different rules last summer, I attended a conference at which Commissioner Campos publicly spoke out against both proposals, a stance most investors agreed with. It was a view expressed constantly in thousands of comment letters investors sent to the SEC, only to find their voices falling on deaf ears and their views ignored. Campos also urged the SEC to leave things as they stood after the Second Circuit’s decision, as that was truly best for both sides in this heated debate.

By passing the non-access rule, three of the four current Commissioners have only served to increase the likelihood of open warfare, and perhaps litigation, between shareholders and management. As Chairman, Christopher Cox had the simple choice whether to bring proxy access to a vote or not, and then he alone had the choice as to how he would vote. Indeed he was very decisive when he chose to bring the issue to a vote, and then voted for non-access. He unequivocally made his views on shareholder access very clear. While he speaks of favoring access for investors, his actions speak much louder than any spoken words, and show that he truly opposes shareholders receiving equal rights and access with management to the proxy. Even if Roel Campos had continued as Commissioner, the end result under the current Commission would not have changed. Cox had the chance to vote with Commissioner Nazareth and made his own decision not to. That is a fact beyond argument.

…continue reading: Heroes and Villains

(Editor’s Note: A version of this article appears in the current issue of Directorship.)

We deal here with one of the more challenging provisions of the Sarbanes-Oxley Act of 2002, referred to by some as “SarbOx.” Specifically, section 407 of that Act requires public companies to disclose in their annual reports to the Securities and Exchange Commission, pursuant to an implementing SEC regulation, whether their audit committees include a financial expert–and if not, why not.

SarbOx spells out a complex schema for a financial expert’s qualifications. According to the statute, an expert is expected to have (1) an understanding of (i) generally accepted accounting principles (GAAP), (ii) financial statements, and (iii) audit committee functions, and (2) experience with (i) internal accounting controls, (ii) the preparation or auditing of “generally comparable” issuers’ financial statements, and (iii) applying GAAP to accounting for estimates, accruals and reserves.

A draft SEC regulation implementing this SarbOx provision was put out for comment in October of 2002, while the final rule was adopted in January and became effective in July of 2003. In response to a flood tide of comments on the rule proposal, some ameliorating adjustments were made in the final rule. For example, the “financial expert” term was repositioned as “audit committee financial expert”–ACFE, or “ack-fee”–to distinguish it from the long-familiar expertise concepts embedded in securities regulation.

…continue reading: ACFE Designations Under Sarbanes-Oxley: Directors Beware!

While I have a lot of admiration for SEC Commissioner Annette Nazareth, and certainly respect her views on proxy access, I thought it rather unfair of other Harvard Law blogsters to give so much attention to her statement about the SEC’s supposed “no access” decision at its November 28 meeting–while paying little or no attention to the thoughtful statement of SEC Chairman Christopher Cox on the subject.

It’s a bit sad when we academics surrender to the sloppy sloganeering of interest groups and the press on an issue such as this, and don’t look at what action was actually taken and the reasons behind it. While Cox might have done nothing on November 28, as some advocates strongly urged, the principled position he did take–and the lawyerly analysis he presented–was no surprise. Cox had said numerous times that the course the SEC took was what he thought was the best thing to do in the circumstances, and his reasoning deserves consideration.

Importantly, Cox made clear that he personally supports proxy access, and plans to try again to come up with an approach that will garner majority Commission support next Spring, when presumably two new Democratic Commissioners will be in place. If one supports meaningful proxy access as a matter of policy, then the villain in this little drama is not Chris Cox but former Commissioner Roel Campos who, although supporting proxy access verbally, left the stage hastily before the crucial vote, thus leaving Chairman Cox unable to muster a Commission majority for any action other than the one taken on November 28.

The Court of Chancery’s recent decision in Ryan v. Gifford puts corporate boards and their attorneys on notice that the attorney-client privilege may not protect corporate investigations from discovery in shareholder suits.

A special committee of the board of directors of Maxim Integrated Products, Inc., engaged Orrick Herrington & Sutcliffe LLP to conduct an investigation into alleged options backdating at Maxim. Orrick produced a final report to the special committee, and shared that report with the full board of directors. The plaintiffs in a shareholder derivative suit sought to compel production of the report and all communications concerning the investigation between Orrick and the special committee or Maxim.

Chancellor William B. Chandler, III held that that the special committee could not assert the attorney-client privilege against the shareholder plaintiff under the Garner v. Wolfinbarger theory, which allows shareholders to access their corporation’s privileged information in certain circumstances. In any event, the court held, the committee had waived its attorney-client privilege by sharing its report with the full board of directors of Maxim, some of whom were the subject of the investigation. The court further ruled that the presentation of the report to the full board resulted in a waiver of all other privileged communications relating to the investigation.

The Chancellor’s ruling can be accessed here.

Recently, in the Law, Economics, and Organization Seminar here at the Law School, Robin Greenwood presented his paper, co-authored with Michael Schor, entitled Hedge Fund Investor Activism and Takeovers. Using data derived from 13D filings following stock purchases by shareholder activists, the study examines the effect of activist investors on performance. The abstract of the Article follows:

We examine long-horizon stock returns around investor activism in a comprehensive sample of 13D filings by portfolio investors between 1993 and 2006. Announcement returns and long-term abnormal returns surrounding investor activism are high for the subset of targets that are acquired ex-post, but not detectably different from zero for firms that remain independent a year after the initial filing. Firms that are targeted by activists are more likely to get acquired than those in a control sample. The results suggest that hedge funds’ short investment horizons make them better suited to identifying undervalued targets and prompting a takeover than at fixing corporate strategy or tackling long-term corporate governance issues.

The full Article is available for download here.

Marty Lipton’s Some Thoughts for Boards of Directors in 2008 is a wide-ranging view of the challenges facing boards of directors in the post-Enron world. The principal focus is on the implications of the attack on the director-centric model and the pressures for short-term performance. The Memo’s first page states rather bluntly what is at stake:

“The need to critically evaluate these trends, rather than passively adhering to the shareholder rights and other activist mantras of the post-Enron period, has become grave. The demonstrated genius of the large public corporation has been its ability to harness equity, debt and human resources to invest in large projects with long-term investment horizons, and the success of such ventures has been integral to the remarkable flourishing of the U.S. economy over time. To the extent that boards are increasingly vulnerable to demands for short-term gains, these trends promise to have repercussions not just for the role of the corporate board but for American business more generally.”

The full Memorandum is available here.

(Editor’s Note: We have posted on the SEC’s recent vote on proxy access here and here. Previously we hosted several competing views on the vote, including this post by Lynn Stout on her Wall Street Journal op-ed and this post by Lucian Bebchuk on a comment letter submitted to the SEC by thirty-nine law professors.)

Hunton & Williams has recently released this client alert on the SEC’s recent amendment to the proxy access rules. The alert provides a quick background on the SEC’s decision to reaffirm its longstanding interpretation of Rule 14a-8(i)(8). As we note, however, “[t]he battle over shareholder access to company proxy materials may not be over,” as the SEC’s express willingness to continue its analysis will probably keep it a hot issue in 2008.

The client alert is available for download here.

With his November 30 opinion in Globis Partners v. Plumtree Software, Vice Chancellor Parsons weighs in on the evolving standards for merger-related disclosure of projections, as well as investment bankers’ work and compensation. The opinion also importantly confirms that, even where a complaint invokes Revlon’s reasonableness standard by challenging the directors’ approval of a cash-out merger, it can still be dismissed at the pleading stage if it fails to allege facts sufficient to rebut the presumptions of the business-judgment rule.

…continue reading: Chancery Weighs in on Disclosure of Projections in Merger Votes

Three senior partners at Wachtell, Lipton, Rosen and Katz–Andrew Brownstein, Theodore N. Mirvis, and Paul K. Rowe–spoke last week at the Law School’s Law and Finance Seminar on the case against shareholder interference. The speakers began by posing a series of questions and challenges to those seeking governance reforms–and warned against making significant changes to a governance system that, in their view, has performed remarkably well over a long period of time.

The talk built on several articles and memoranda the speakers have published on corporate governance along with their partners William Savitt, Martin Lipton, Eric S. Robinson, and Mark Gordon. Those pieces include Bebchuk’s “Case For Increasing Shareholder Power”: An Opposition; Private Equity and the Board of Directors; Classified Boards Once Again Prove Their Value to Shareholders in Recent Takeover Battle; Deconstructing American Business, and Deconstructing American Business II.

A video of the panel discussion is available online here. The questions and challenges the speakers set forth at the outset of their talk can be found here.

Recently, the Mergers, Acquisitions, and Split-Ups course here at Harvard Law School, co-taught by Professor Robert Clark and Vice Chancellor Leo Strine, Jr., hosted a panel discussion entitled Private Equity Buyouts.  The candid discussion among the expert practitioners on the panel provided rare insights into the internal dynamics of private equity deals.

The panelists included Louis D’Ambrosio, Chief Executive Officer of Avaya, which was recently taken private by the Texas Pacific Group; Robert L. Friedman, Chief Legal Officer of Blackstone; and Eileen Nugent of Skadden, a leading corporate practitioner with extensive experience in leveraged buyout transactions.  In response to questions from Professor Clark, Vice Chancellor Strine, and the audience, the panel shared its insights on matters including the current deal environment for private equity, a board’s fiduciary duties when evaluating a private equity firm’s buyout offer, and the emergence and relevance of “go-shop” provisions in private equity transactions.

A video of the panel discussion is available for download here.

The Committee on Negotiated Acquisitions of the American Bar Association’s Section of Business Law recently released the 2007 Strategic Buyer/Public Target M&A Deal Points Study. I am the Chair of the Committee’s M&A Market Trends Subcommittee, which compiled the Study.

The Study examines key deal points in acquisitions of publicly traded companies by strategic buyers announced in 2005 and 2006. Among the many interesting findings of the Study is that almost 50% of the acquisition agreements in the sample contained provisions precluding the Board of Directors from changing its recommendation in favor of the acquisition absent a topping bid. (Those provisions are described on pages 47 and 48 of the Study.) This would seem to cut against the views of many practitioners (supported, to some extent, by language in Chancery’s 2005 decision in Frontier Oil v. Holly Corp., as well as comments made publicly in early 2006 by a leading Delaware jurist) that such a limitation could violate the fiduciary duties of the Board of Directors under Delaware law.

My colleague, Rick Climan, former Chair of the Committee on Negotiated Acquisitions, acted as special advisor on this project. Wilson Chu and Larry Glasgow, the former Co-Chairs of the M&A Market Trends Subcommittee, and more than 20 M&A lawyers from major law firms across North America, assisted in its compilation.

The full Study is available for download here.

Our firm has recently released a new M&A Commentary on proposals requiring an annual shareholder vote on executive compensation, known as “Say on Pay” proposals, that many public companies are likely to face during the 2008 proxy season. The Commentary, entitled “Say on Pay” Shareholder Advisory Votes on Executive Compensation: The New Frontier of Corporate Governance Activism, provides management and boards with a strategic overview of the issues these popular shareholder proposals are likely to raise–and describes the implications that will follow if the proposals pass. Among other things, the Commentary notes that:

The advent of “Say on Pay” for a company means, as a practical matter, that its executive pay policies and procedures will have to meet ISS guidelines on executive compensation or suffer a very strong risk of ISS recommending that shareholders vote “No on Pay.” Such a negative vote, if not addressed promptly by modifying executive compensation to fit ISS guidelines, will almost certainly lead to an ISS withhold vote recommendation against the compensation committee and perhaps the entire board.

The full Commentary is available online here.

The SEC’s vote affirming the exclusion of stockholder proposals seeking access to the company’s proxy to run a director election proxy fight has drawn this short and sweet applause from the attorneys most involved in the fight at Wachtell, Lipton, Rosen & Katz.

Martha Carter, who heads the design of corporate governance policies at RiskMetrics, recently gave a presentation at the Shareholder Activism class here at Harvard Law School. In her talk, Carter offered an assessment of last year’s proxy season; the issues likely to arise during the coming proxy season; and an account of the issues receiving the most attention from investors.

A video of Martha’s talk is available for download here. The materials accompanying her initial remarks can be viewed online here.

(Editor’s Note: We have hosted several posts on the SEC’s consideration of shareholder access to the ballot, including this post by Lucian Bebchuk on a comment letter submitted to the SEC by thirty-nine law professors and this post by Lynn Stout on her Wall Street Journal op-ed on the subject.)

The SEC today voted 3-1 to adopt a rule permitting companies to exclude from the corporate proxy shareholder proposals on ballot access for director elections. Although the text of the final rule is not yet available, the SEC has released a forceful speech by the lone dissenter, Commissioner Annette Nazareth, expressing her disappointment in the SEC’s decision.

The speech is worthwhile reading for anyone interested in the future of the ballot-access issue. Commissioner Nazareth’s talk concludes:

Shareholder rights face a long uphill battle with this Commission. I hope we have not completely lost the opportunity to address these issues thoughtfully. Given that all 40 of the largest markets outside the U.S. give investors in public companies the ability to nominate and remove directors, this recognition of shareholder rights is long overdue. Chairman Cox has clearly stated his intention to move forward with proxy access in the very near future. I fervently hope that is the case and that this effort succeeds in the coming year.

The full text of Commissioner Nazareth’s speech is available here.

Effective corporate governance requires reliable and consistent financial statements. Investors depend upon auditors to verify what management has done each year in innumerable corporate transactions. For decades, the American generally-accepted accounting principles (GAAP) have admirably and ably provided reliable reporting on a vast array of modern business situations.

Yet a serious drive to eliminate American GAAP, and replace them with the International Financial Reporting Standards (IFRS), is underway. A coalition has led a well-financed campaign to “dumb down” the financial reporting system that we all have grown to know, love, and trust.

Corporate management, of course, are behind this drive, hoping for their own convenience to be less accountable. This is understandable. But major American accounting firms have, surprisingly, joined with management. And the Securities and Exchange Commission, under Chairman Christopher Cox, has put more widespread use of the IFRS onto its active agenda.

…continue reading: GAAP in Peril

The Delaware Court of Chancery issued a decision last week of both practical and theoretical importance for corporate lawyers. The opinion is Melzer v. CNET Networks, Inc., and there are at least three reasons why this case is noteworthy.

First, the court held that Section 220 of the Delaware General Corporation Law, which is the statutory basis on which stockholders can demand books and records of a company, enables plaintiffs under certain circumstances to receive documents for a period prior to their stock ownership. In order to allow a pleading to be prepared with details of alleged “systemic and sustained” lack of oversight by the board (the well-known Caremark standard), the Court allowed the plaintiffs to access materials prepared before they became stockholders.

Second, the case is interesting because it began as a derivative action filed in federal court in California. The California case was dismissed by the federal judge, however, who instructed the plaintiff to avail himself of the provisions of DGCL Section 220. The parties now appear to be headed back to California, where the plaintiff will be able to amend the complaint in light of the discovery authorized in this opinion.

Finally, the case is striking because the defendant admitted that it engaged in the backdating of stock options, which is the factual basis of the underlying claims. In a separate blog post that can be found here, I offer more analysis of those facts and the court’s application of Delaware law to this fascinating case.

The SEC has been considering the issue of increased shareholder access to the corporate proxy and director elections. Labor union pension funds have been among the more vocal proponents of increased access, arguing that such access will lead to improved financial performance. Business groups, such as the Business Roundtable, have argued against increased access on the grounds that such access would encourage special-interest shareholders and would decrease shareholder value. The desirability of increased shareholder access, then, depends to a large degree on the extent to which labor unions (and other politically minded shareholders) pursue the interests of shareholder value rather than their own self-interest.

One of our Ph. D. students, Ashwini Agrawal, has written one of the first papers that addresses this issue. Ashwini noticed that in 2005, the AFL-CIO (the central federation of labor unions in the U.S.) split into two groups. Several of its member unions, representing roughly 35% of its members, left to form a new organization–the Change To Win (CTW) coalition. This exogenous shift in AFL-CIO membership allows Ashwini to examine changes in the voting behavior of AFL-CIO affiliated shareholders toward management and director nominees.

The results are striking. Ashwini finds that AFL-CIO affiliated pension funds are significantly more supportive of director nominees once the AFL-CIO no longer represents workers at a given firm (roughly 74% after versus 55% before). At the same time, AFL-CIO affiliated pension funds do not change their voting behavior when the AFL-CIO still represents workers at a given firm. Ashwini finds the opposite pattern in voting behavior for a pension fund associated with the CTW coalition. Finally, he finds no change in voting behavior for mutual funds.

These differences suggest that labor unions use their pension funds to pursue labor relations issues at the expense of shareholder value. And they suggest that there is some truth to the concerns that increased shareholder access might have unintended consequences.

Ashwini’s full paper, Corporate Governance Objectives of Labor Union Shareholders, is available for download here.

(Editor’s Note: This post comes to us from Claudia H. Allen of Neal, Gerber & Eisenberg LLP.)

We have recently released the November 2007 edition of the Study of Majority Voting in Director Elections, which demonstrates that majority voting for the election of directors, which has been characterized by its advocates as a tool for increasing director accountability, has become the prevailing election standard among large, public companies. As issuers prepare for the 2008 proxy season, a few statistics and examples drawn from the Study underscore that majority voting has become a relatively mature, as well as widespread, movement.

Majority Voting in the S&P 500 and Fortune 500. 66% of the companies in the S&P 500 and over 57% of the companies in the Fortune 500 have adopted a form of majority voting, notwithstanding robust levels of merger and acquisition activity early in 2007 that resulted in several firms with majority voting going private. By way of contrast, when the Study was initially published in 2006, only 16% of the companies in the S&P 500 had adopted a form of majority voting.

…continue reading: Study of Majority Voting in Director Elections

I recently presented my new discussion paper with Mark Roe, Public Enforcement of Securities Laws: Preliminary Evidence, at the Conference on Empirical Legal Studies at the New York University School of Law. The paper develops a measure of securities-enforcement intensity and examines financial outcomes worldwide in light of enforcement activity. The abstract of the paper follows:

The legal consequence of economic actors ignoring their legal obligations, such as laws that protect outside investors in firms, is a recurring issue. Recent scholarship examines the relative importance of private enforcement for investor protection on the one hand–via disclosure and lawsuits among contracting parties–and public enforcement on the other–via financial, regulatory, and even criminal rules and penalties. Recent financial work has seen the former to be more important than the latter. Yet much recent legal scholarship has seen private enforcement of securities laws in the United States as poorly designed, with firms–and, hence, wronged shareholders–often bearing the cost of insiders’ errors and disclosure failure. To better understand the relative importance of public and private enforcement, we here develop an enforcement variable based on securities regulators’ staffing levels and budgets. We then examine financial outcomes around the world–such as stock market capitalization, trading volume, number of domestic firms, and number of IPOs–in light of these measures of public enforcement and find that more intense public enforcement regularly correlates with strong financial outcomes. In horse races between our measures of public enforcement and the measures of private enforcement prominent in recent financial scholarship, public enforcement is typically at least as important as private enforcement in explaining important financial market outcomes around the world.

The full paper is available for download here.

(Editor’s Note: This post comes to us from Jonathan Hayter of the National Law Journal.)

The National Law Journal recently published Programmed Stock Trading Plans Eyed, which highlights recent efforts by corporate boards to ensure that executives’ stock-trading plans meet the requirements of Rule 10b5-1. That Rule permits firms to trade the company’s stock for the benefit of insiders on the basis of a predetermined plan, but corporate directors are concerned that the SEC may be preparing to bring enforcement actions on the ground that executives made changes to their plans while in possession of inside information.

Those concerns, the piece explains, stem from recent allegations that Countrywide Financial executive Angelo Mozilo, who allegedly made changes to his 10b5-1 plan in the midst of recent mortgage-market turmoil. Those claims, combined with the recent conviction of former Quest CEO Joseph Nacchio, have led boards to seek counsel as to whether their executives have made changes to the plans that run afoul of the Rule, especially because the plans are generally prepared by outside brokerage houses rather than in-house counsel or members of the board.

The SEC’s attention, the article explains, has been drawn to the issue in part by a recent study by Alan Jagolinzer of Stanford Business School. That study, which can be downloaded here, found that insiders with 10b5-1 plans managed to generate abnormal forward-looking returns larger than their colleagues who did not have such plans. Following the release of the study, the Director of the SEC’s Division of Enforcement, Linda Chatman, commented that the Commission “wanted to make sure that people are not doing [with 10b5-1 plans] what they did with stock options.” To date, the article notes, the SEC has not yet brought an enforcement case based on changes to a Rule 10b5-1 plan, but boards of directors have begun the process of learning exactly how and when an executive can make changes to such plans.

The full article is available for download here.

(Editor’s Note: This post comes to us from John L. Reed of Edwards Angell Palmer & Dodge. John has previously posted here on his 2006 Corporate Governance Litigation Review.)

On November 27, in Boston, Massachusetts, two corporate law icons–Delaware Vice Chancellor Leo E. Strine, Jr., and Wachtell Lipton Rosen & Katz partner Marty Lipton–will present their views on the current state of and trends in corporation law, as well as significant areas of concern to all directors in both public and private companies, at an upcoming breakfast event at the Boston Harbor Hotel.

Whether you are interested in director responsibilities in connection with a merger, the courts’ standard of review of director action when it comes to stockholder-voting issues, or corporate responsibility for option-pricing irregularities, this program should prove to be invaluable. Both Vice Chancellor Strine and Marty Lipton are at the forefront of shaping best practices, and they will participate in an extended question-and-answer session you will not want to miss.

This exciting program is being presented by the New England Chapter of the National Association of Corporate Directors, with the assistance of the Harvard Law School Program on Corporate Governance. Details for the event are available here, and you can register to attend online here.

In an earlier post, I discussed my recent discussion paper on loss causation in Rule 10b-5 actions. (The paper is coming out in the November issue of The Business Lawyer.) One of the issues discussed in the paper is the “true financial condition” theory of loss causation.

According to this theory (which we reject), if a negative disclosure by the firm reveals the “true financial condition” of the company that was concealed by an earlier misrepresentation then loss causation, as discussed in the Supreme Court’s decision in Dura Pharmaceuticals, has been satisfied. Our paper points out that, without a concrete link establishing that the negative firm disclosure (such as a downwards earnings projection) revealed to the market the fact that there was a prior misrepresentation, the “true financial condition” theory of loss causation largely vitiates Dura Pharmaceuticals and the loss causation requirement.

In a recent Memorandum Order in Ryan v. Flowserve Corp., the United States District Court for the Northern District of Texas has just denied class certification in a Rule 10b-5 action and dismissed plaintiffs’ claims for failure to establish loss causation. The plaintiffs relied on the “true financial condition” theory to demonstrate loss causation, and the court rejected this argument, citing our paper. (In the interests of full disclosure, I was also an expert on that case).

The Court’s Memorandum Order is available here. Our paper, The Loss Causation Requirement for Rule 10b-5 Causes-of-Action: The Implications of Dura Pharmaceuticals v. Broudo, can be downloaded here.

The Harvard Law School Program on Corporate Governance just issued my discussion paper, CEO Centrality, co-authored with Martijn Cremers and Urs Peyer. Our abstract describes the paper as follows:

We investigate the relationship between CEO centrality – the relative importance of the CEO within the top executive team in terms of ability, contribution, or power – and the value and behavior of public firms. Our proxy for CEO centrality is the fraction of the top-five compensation captured by the CEO. We find that CEO centrality is negatively associated with firm value (as measured by industry-adjusted Tobin’s Q). Greater CEO centrality is also correlated with (i) lower (industry-adjusted) accounting profitability, (ii) lower stock returns accompanying acquisitions announced by the firm and higher likelihood of a negative stock return accompanying such announcements, (iii) greater tendency to reward the CEO for luck in the form of positive industry-wide shocks, (iv) lower likelihood of CEO turnover controlling for performance, and (v) lower firm-specific variability of stock returns over time. Overall, our results indicate that differences in CEO centrality are an aspect of firm management and governance that deserves the attention of researchers.

The full paper can be downloaded here.