Robert Anderson and Jeffrey Manns

The Delaware Delusion

Delaware dominates the incorporation market, with approximately 60% of publicly traded companies in the United States incorporated there, including 63% of the Fortune 500 companies. Over 90% of companies that incorporate outside of their principal state of operations make Delaware their state of incorporation. The unresolved question is why corporate lawyers and their clients are drawn to Delaware when most companies have little more than a P.O. Box based in the state.

In The Delaware Delusion, we set out to empirically assess whether there is an economic basis for Delaware’s appeal in the market for company incorporations. We set out … Read more

Akin Gump discusses Rebutting the Fraud-on-the-Market Presumption in Securities Class Actions: Halliburton Class Certified Over Price Impact Objections

On July 25, 2015, Judge Barbara Lynn of the Northern District of Texas issued a formative opinion in the class actions securities arena. The case, The Erica P. John Fund, Inc., et al. v. Halliburton Co., et al., No. 3:02-CV-1152-M, is viewed as a bellwether among securities class actions due to its treatment of novel issues regarding, among other things, a defendant’s ability to disprove reliance—i.e., a causal link between alleged misrepresentations and an eventual drop in stock prices upon correction—for purposes of class certification.

Rather than requiring plaintiffs to prove reliance for each individual shareholder, securities class action … Read more

Paul Hastings discusses SEC Proposal to Enhance Reporting by Investment Companies and Investment Advisers

On May 20, 2015, the Securities and Exchange Commission (“SEC”) proposed a set of rules, forms and amendments to that would expand and update certain reporting and disclosure obligations of registered investment companies[1] and registered investment advisers[2]. The proposed rules seek to improve the quality of information available to investors, to allow the SEC to more effectively collect and utilize the data provided, and further, to enhance the SEC’s ability to monitor risks in the asset management industry.

Proposed new rule 30e-3 under the Investment Company Act of 1940, as amended (“1940 Act”), would provide registered investment … Read more

Margaret Blair and Elizabeth Pollman

The Derivative Nature of Corporate Constitutional Rights

The role of money and business interests in politics continues to stir controversy. As the nation begins another presidential cycle that is expected to break spending records, we will likely hear analysts argue that the Supreme Court’s decision five years ago in Citizens United v. FEC[1] opened the floodgates by allowing unlimited independent political expenditures from corporate treasuries. A series of calls for reform has followed the decision, including the recent open letter published by former SEC officials asking the agency to require disclosure of corporate political spending. These important issues of our time are rooted in a much … Read more

Jay Kesten

Adjudicating Corporate Auctions

When a board of directors resolves to sell the corporation, it must structure the sale so as to obtain the highest price reasonably available. In the landmark case Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., the Delaware Supreme Court held that when a sale of the corporation becomes inevitable, the “directors’ role change[s] from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders . . . .” Post-Revlon, auctions have become a pervasive feature of the modern takeover landscape. Indeed, a recent survey of four hundred large-scale takeovers with a … Read more

Gibson Dunn discusses Delaware Supreme Court Ruling Interpreting Advance Notice Bylaws in Favor of Stockholder Seeking to Propose Business and Nominate Directors

On July 2, 2015, in Hill International, Inc. v. Opportunity Partners L.P., No. 305, 2015, the Delaware Supreme Court affirmed a Court of Chancery decision that Opportunity Partnership L.P. (the “Fund”), a stockholder in Hill International, Inc. (“Hill” or the “Company”), had complied with the Company’s advance notice bylaws and thus timely submitted two business proposals for consideration and two nominees for election at Hill’s 2015 Annual Meeting (the “Notice”). Accordingly, the Supreme Court held that it was proper to enjoin the Company from conducting any business at the Annual Meeting other than convening the Meeting for the sole … Read more

Onnig Dombalagian

Thoughts on the Evolution of Stock Exchanges

Can stock exchanges adapt to the challenges of today’s capital markets? As “self-regulatory organizations,” U.S. stock exchanges once enjoyed a nearly exclusive role in coordinating information and trading through interwoven regulatory, mutual, and commercial arrangements with public companies, brokers, and dealers. Competitive and regulatory challenges have gradually chipped away at the mystique of self-regulation. While listing in the United States largely remains a duopoly shared by the NYSE and Nasdaq, primary exchanges no longer account for a majority of trading volume in their listed securities. Moreover, even as they continue to play an essential role in setting market prices, their … Read more

Adam Prichard

Dirks and the Genesis of Personal Benefit

In United States v. Newman, 773 F.3d 438 (2nd Cir. 2014), the Second Circuit overturned the insider trading convictions of two hedge fund managers who received material nonpublic information from public companies via an extended tipping chain. The Newman court was required to interpret the Supreme Court’s decision in Dirks v. SEC, 463 U.S. 646 (1983), to answer the question: What must tippees know about the disclosure of non-public information by the tipping corporate insider in order to sustain a conviction?

Dirks, in an opinion written by Justice Lewis F. Powell, Jr., held that there was … Read more

Simpson Thacher discusses SEC Charges Against Computer Sciences Corporation and its Former Executives for Accounting Fraud, Invoking Sarbanes-Oxley’s Clawback Provision

On June 5, 2015, the Securities and Exchange Commission (“SEC”) entered into settled administrative cease-and-desist proceedings with Computer Sciences Corporation (“CSC”) and some of its former executives due to the company’s alleged manipulation of financial results and concealment of problems with the company’s largest contract.[1]   Among other things, CSC agreed to pay a $190 million penalty to settle the charges, and two of CSC’s former executives agreed to return a portion of their compensation to CSC pursuant to the clawback provision of the Sarbanes-Oxley Act of 2002. The SEC also charged former CSC finance executives for ignoring accounting standards … Read more

Reena Aggarwal, Sandeep Dahiya and Nagpurnanand Prabhala

The Power of Shareholder Votes: Evidence from Director Elections

Our paper titled “The Power of Shareholder Votes: Evidence from Director Elections” aims to answer the question: Do shareholder votes matter in uncontested director elections? In principle, shareholders who own a firm should be free to pick the board members who represent them. However, in the U.S., for the most part, shareholder votes for director elections are non-binding, leading scholars to describe shareholder votes as “sham democracy”. Plenty of anecdotal evidence supports this view. For instance, in Cablevision Systems, shareholders repeatedly cast majority votes against re-electing three directors. The directors remained on the board.

Is the Cablevision election an isolated … Read more

Gibson Dunn discusses Delaware Court of Chancery Opinion Clarifying Director and Officer Advancement Rights

On May 28, 2015, Chancellor Bouchard of the Delaware Court of Chancery issued an opinion clarifying and strengthening the rights of a former director and officer to receive mandatory advancement under a corporation’s charter. In Blankenship v. Alpha Appalachia Holdings, Inc., C.A. No. 10610-CB (Del. Ch. May 28, 2015), the Court held that, where a corporation has agreed to indemnify and advance defense costs to the fullest extent permitted by law, the corporation cannot later condition its advancement obligation on statements about an individual’s belief that he or she acted lawfully. Instead, the only condition for advancing defense costs … Read more

John Coffee, Headshot

News From California: The 9th Circuit and the SEC Challenge New York

This column will focus on two new and unrelated developments linked only by the fact that they both emanate from California: (1) the Ninth Circuit has handed down a significant decision on insider trading—United States v. Salman[1]—that disagrees (at least marginally) with the Second Circuit’s important (but controversial) decision in United States v. Newman[2]; and (2) the SEC’s Regional Office in California has issued Wells Notices to attorneys, taking the position that an attorney representing clients in immigration matters may be acting as a broker under the federal securities laws. The upshot is to place the … Read more

Kathryn L. Dewenter and Leigh A. Riddick

What’s the Value of a TBTF Guaranty? Evidence from the G-SII Designation for Insurance Companies

Since AIG’s bailout in September 2008, the role of large, complex insurance firms in the global financial system has received much attention. Concern about the global operations, interconnectedness, and non-traditional activities of these large firms prompted the Financial Stability Board to formally designate 9 life and full insurance firms in six countries as Global-Systemically Important Insurers (G-SII) in July 2013. In the US, where insurance industry assets equal roughly half the size of total assets held by all financial institutions covered by the Federal Deposit Insurance Corporation, the Financial Stability Oversight Council has confirmed the designation of AIG, MetLife and … Read more

peregrine

Practical Board Guidance based on Chief Justice Strine

Both “deal” and “governance” counsel will enjoy sharing with corporate clients the highly practical guidance provided by Chief Justice Leo E. Strine, Jr. in a newly published article in The Business Lawyer.[1] In his article, the Chief Justice identifies several actions lawyers can recommend to improve the process by which boards review merger/acquisition proposals. These include promoting more effective decision making, mitigating the potential for conflicts of interest and more accurately recording the exercise of board judgment – all for the purpose of reducing transaction exposure to future litigation challenge. More broadly, these recommendations serve to underscore the … Read more

Mehmet İhsan Canayaz, Jose Vicente Martinez and Han N. Ozsoylev

Returns on Hiring Public Officials

If you think nothing is impossible, try slamming the revolving door of Washington. Despite widespread frustrations, it continues to shuffle employees between government and corporate jobs, and it’s not expected to stop spinning any time soon.

Many on the street eye senior-level government-to-corporate career transitions with suspicion. A prime example is the case of Darleen Druyun. Druyun, who oversaw the management of weapons acquisitions program for the U.S. Air Force, joined Boeing in 2003 as the Deputy General Manager for Missile Defense Systems. Subsequent disclosures revealed that she was negotiating the terms of her Boeing employment while she was handling … Read more

Simpson Thacher discusses Delaware Chancery Court Ruling that Self-Interested Director Compensation Decisions May, Under Certain Circumstances, Be Subject to Entire Fairness Review

A recent Delaware Chancery Court decision confirms that, as the court held three years ago in Seinfeld v. Slager, there is no shareholder ratification defense for self-awarded director compensation granted under a stockholder-approved option or bonus plan that lacks “sufficiently defined terms” or “some meaningful limit” on director discretion.[1]

I. GENERAL STANDARD

Director decisions are generally afforded wide latitude under the business judgment rule.[2] The protections of the business judgment rule, however, “can only be claimed by disinterested directors.”[3] The “directors can neither appear on both sides of a transaction nor expect to derive any personal … Read more

Wulf Kaal

Stock Price Response to Non- and Deferred Prosecution Agreements

In response to perceived corporate governance shortcomings in major U.S. corporations, the U.S. Department of Justice, starting in 2002, substantially increased the execution of non- and deferred prosecution agreements (N/DPAs). High profile N/DPAs and plea agreements executed in 2012 and 2014 suggest that the DOJ – not judges or the legislature – through its targeting of certain industries, is effectuating large-scale corporate governance changes. The companies subject to NDPAs are among the largest domestically and worldwide, including Johnson & Johnson, KPMG, HSBC, JPMorgan Chase, Deutsche Bank, ABN Amro Bank, Barclays Bank, Credit Suisse, Fannie Mae, Freddie Mac, General Reinsurance, … Read more

black-decarvalho-khanna-kim-yurtoglu

Which Aspects of Corporate Governance Matter in Emerging Markets: Evidence from Brazil, India, Korea, and Turkey

Emerging markets are increasingly important destinations for international capital flows. Yet these markets pose important risks for investors, in addition to the business risks present in every market. For example, in some countries, many public firms are part of family business groups, raising the risk of self-dealing by the controllers. Thus, firm-level corporate governance can be an important factor in investors’ decisions on which countries and firms to invest in, and how much to pay for shares. Yet, despite the important role of corporate governance in affecting firm value, little is known about what aspects of governance are valued by … Read more

Eric Talley

When Fiduciary Duties and Entrepreneurial Innovation Collide: AngioScore v. TriReme

Some legal rights and obligations are so venerated and longstanding that they have become virtual absolutes—categorical imperatives that trump other less urgent considerations. But what happens when two such absolutes collide? This was a question that the US District Court of the Northern District of California had to wrestle with recently, in a case pitting directors’ fiduciary duties against their entrepreneurial rights to innovate.[1]

The case concerned a medical device company’s complaint against its former director for breach of fiduciary duty. His offense? Secretly developing a new technology that competed with (and arguably improved upon) the corporation’s core product … Read more

demirtas-celik-isaksson

Corporate Bonds, Bondholders and Corporate Governance

In recent years, corporate bond markets have become an increasingly important source of corporate finance, especially for non-financial companies. Given this worldwide trend, it is crucial for policy makers, regulators and market participants to have access to a comprehensive overview of corporate bond market developments and the structural issues accompanying these trends. In the recent OECD working paper entitled “Corporate Bonds, Bondholders and Corporate Governance”, we aim to serve this need by analysing more than 100,000 corporate bonds issued between 2000 and 2013 by companies from 108 different countries[1].

As depicted in Figure 1, the annual amount of … Read more