On May 6, 2016, in Singh v. Attenborough, No. 645, the Delaware Supreme Court strengthened the defenses available to directors by clarifying a roadmap for effectively dismissing post-closing claims for breach of fiduciary duty. A fully informed, uncoerced vote of the majority of disinterested stockholders, and a well-run sale process with any deficiencies either avoided or disclosed in advance of the stockholder approval are key to invoking director-favorable protections against post-closing liability for breach of fiduciary duty in merger transactions.
The Supreme Court issued the Order upon reviewing Chancery Court’s dismissal of stockholder-plaintiffs’ claims for breach of fiduciary duty … Read more
Over the last twelve months, over fifty US publicly traded companies with a market capitalization of over $1 billion have announced plans to spin-off lines of business into independent companies. During that period, companies such as Starwood Hotels, ConAgra Foods, and Citrix Systems have announced spin-offs of one or more businesses.
Spin-offs are motivated by various reasons, but the common theme in these transactions is that the spun-off entity and the remaining corporation should perform better and achieve better market valuation on a stand-alone basis.
A spin-off is effected by reorganizing a line of business, contributing its assets and liabilities … Read more
Following the 2008 financial crisis, more and more countries have begun to embrace whistleblower protections as a tool to change corporate cultures. Such provisions may give whistleblowers the protections they need to raise their voices, and draw attention to undesired and sometimes even illegal activities, in situations when they would otherwise remain silent. After all, many people will hesitate to point out questionable conduct if they know they might face retaliation.
In the United States, Congress authorized the SEC to go further than other whistleblower provisions by authorizing a bounty program—allowing the SEC to reward whistleblowers for particularly valuable tips. … Read more
The Delaware Supreme Court’s recent decision in Singh v. Attenborough (May 6, 2016, en banc, “Zale III”), written by Chief Justice Leo E. Strine, Jr., is consistent with the trend of Delaware decisions that, as a practical matter, have significantly narrowed the risk of directors being found to have breached fiduciary duties in M&A transactions. The decision is most notable, however, for apparently reversing the momentum of recent Delaware decisions that have been interpreted as potentially expanding the risk of aiding and abetting liability for M&A financial advisors.
- Lower risk of aiding and abetting liability for bankers.
… Read more
Controversy surrounding the role of corporations in public life has not abated in the six years since the Justices decided, in Citizens United v. FEC, that corporations have political-speech rights secured by the First Amendment. If anything, the Court’s judgment in Burwell v. Hobby Lobby, Inc., although far less significant in practical terms, magnified discontent in some quarters. Doomed calls for constitutional amendment are still a frequent refrain. At least one presidential candidate has reportedly proposed a litmus test to Supreme Court nominations based on a commitment to overturning Citizens United. And so on. … Read more
On May 5, 2016, the Consumer Financial Protection Bureau (“CFPB”) proposed a rule that would govern two aspects of consumer finance dispute resolution. First, the new regulations would prohibit providers of certain consumer financial products and services from including in their contracts arbitration clauses that prohibit class action lawsuits. Second, covered providers involved in an arbitration pursuant to a pre-dispute arbitration agreement would be required to submit specified arbitral records to the CFPB. If the proposed rule becomes final, it will significantly impact the current industry practice of including arbitration clauses with class action waivers in these types of contracts, … Read more
Target firms typically employ either an auction or a negotiation method during merger negotiations. In auction deals, the pre-public takeover process involves contacting several potential bidders, signing confidentiality/standstill agreements and accepting private bids. In negotiation deals however, the target engages with only one bidder in the pre-public takeover process. Using either selling method, the target board negotiates with the bidder(s) and if an acceptable price is obtained from a bidder, a definitive merger agreement is signed and a public announcement is made. Typically, after the public announcement of a merger agreement, target boards do not actively solicit new bids although … Read more
Covenants are an important feature of loan contracts that enable ongoing monitoring of borrowers by banks and flexible renegotiation of contract terms in the face of changing external and borrower conditions. A large body of empirical research has examined the consequences of loan covenant violations for public firms. However, little is known about how banks react to covenant violations by private companies, despite the large share of these firms in the economy. Any reduction in access to loans is likely to have a more direct impact on investment and employment for private firms since they are primarily reliant on banks … Read more
In Salman v. United States, the Supreme Court will revisit Dirks v. SEC and likely resolve the uncertainty as to personal benefit and insider gifts of confidential information that followed the Second Circuit’s decision in United States v. Newman. The case involves a young investment banker’s gifts of information about unannounced client transactions to his brother, who, in turn, shared the tips with their relative by marriage, the defendant Bassam Salman.
Salman will also be the first time that the Court decides the liability of a downstream insider trading tippee. A decision will therefore likely … Read more
On May 23, 2016, the United States Court of Appeals for the Second Circuit reversed a $1.3 billion civil penalty imposed against Countrywide Home Loans, Inc., Bank of America, N.A., and related defendants (collectively, “Countrywide”) under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”). Although the decision rebuffed the government’s case against Countrywide, it did not address the government’s novel interpretation that FIRREA permits civil penalties against financial institutions whose criminal conduct is “self-affecting.” FIRREA permits civil penalties against a defendant if it commits certain unlawful acts “affecting a federally insured financial institution.” Over a … Read more
There has been tension between the legal academy and the practising profession ever since law was first taught in university law schools in the 19th century. The sense of unease arose because of uncertainty as to whether the primary role of a law school was to train lawyers for practice or to ensure that law was accepted as an independent scholarly discipline appropriate for a university, like history or philosophy. Universities feared that law schools might turn out to be mere trade schools while practitioners feared that an exclusive focus on liberal education would fail to produce skilled practitioners.… Read more
Why do sophisticated parties litigate under clouds of (easily resolvable) jurisdictional uncertainty?
In our recent essay available here, we argue that some sophisticated litigants do not raise obvious jurisdictional defects so that they can use jurisdictional uncertainty as a litigation strategy. Our paper examines, in particular, federal statutory interpleader disputes involving securitized financial instruments (SFIs).
In a federal statutory interpleader action, a custodian of money or property can bring multiple parties into federal court to sort out competing claims. In order for federal courts to have subject matter jurisdiction over these actions, parties must deposit the disputed amount with … Read more
“And we played the Hustle music. There were, you know, printed materials passed out,” with dance steps so “ideally we could all perform the Hustle in precision,” recalled the former Countrywide first vice president. “There was a lot of excitement. There was a lot of fanfare. It was fun.” He was describing events in the summer of 2007, when Countrywide decide to speed up its process for approving loans, using a program called the “High Speed Swim Lane,” or “HSSL” (or “Hustle”). The music stopped after the global financial crisis. Bank of America bought out the failing Countrywide Financial. In … Read more
The U.S. Supreme Court ruled on May 16, 2016 that the provision of the Securities Exchange Act of 1934 granting federal district courts exclusive jurisdiction over suits brought to enforce the Exchange Act is subject to the same jurisdictional test established by the general federal-question jurisdictional statute. The Court held in Merrill Lynch v. Manning that, under both statutes, the question is whether the case “arises under a federal law.” The Court thus rejected the defendants’ effort to remove a case from state court by asserting a broader theory of federal jurisdiction under the Exchange Act.
The Manning… Read more
On May 17, 2016, the Division of Corporation Finance of the Securities and Exchange Commission (the “SEC”) released new and updated Compliance and Disclosure Interpretations (“C&DIs”) on the use of non-GAAP financial measures (“NGFMs”). The release of the C&DIs follows a series of recent speeches by SEC Chair Mary Jo White, Chief Accountant James Schnurr and other staff that expressed concerns over prevalent and liberal use of NGFMs. The C&DIs signal a tightening of the SEC’s policy toward NGFMs and renewed SEC focus on their use.
One new C&DI deserves special attention.
Among the new and updated C&DIs, Question 100.04 … Read more
After the July 4th weekend, Reynolds Holding will be taking over as the fourth editor-at-large of the CLS Blue Sky Blog. It has been a remarkable year and a half, and I am confident our Blog will continue to grow in the coming years. I am grateful to the faculty committee (Professors Jack Coffee, Ed Greene, Robert Jackson and Kate Judge), the student editors (Jennifer Barrows, AJ Farkas and John Knight) as well as Columbia Law School for providing opportunity and support. I intend to continue writing as time allows and invite you to visit my webpage. I believe … Read more
In recent decades, it seems the only reason one flavor of corporate or financial misbehavior falls out of the public discourse is because a newer one has taken its place. Following the widespread corporate frauds of the 1990s, the unscrupulous acts of bankers that contributed to the financial crisis, and the Ponzi scheme orchestrated by Bernie Madoff, to name a few, the thoughtful observer must be left anticipating the next scandalous headline. Given the steady flow of reprehensible actions by business professionals, a considerable amount of attention has been focused on understanding, and perhaps mitigating, egregious behaviors in the business … Read more
Concerns about the governance of public corporations have taken center stage in recent years. Part of the debate on how to improve corporate governance has focused on policies that will give large shareholders (typically institutional investors) greater influence over corporate decisions. Indeed some theoretical and empirical papers support the governance role of large shareholders.
The underlying view is that large shareholders have both the ability and incentive to maximize the value of all shareholders. Large shareholders may improve governance either through active monitoring or through passive selling and both activities are expected to improve governance.
In this paper, we propose … Read more
While it is illegal for insiders to trade on material, non-public information, the SEC has created a safe harbor Rule 10b5-1 since October 2000, by allowing insiders to set up trading plans in advance of actual trading. Since these planned trades are set up in advance of subsequent trading, they allow insiders to buy and sell shares despite possessing material non-public information at the time of the trade, and consequently, they can serve as an affirmative defense in case of litigation. However, these plans are not foolproof. There is growing suspicion among both finance and legal experts that significant … Read more
The Public Company Accounting Oversight Board (“PCAOB”) recently re-proposed an audit standard to amend the form and content requirements for the independent auditor’s report on financial statements. The new proposal retains the pass/fail model present in the existing audit report but also requires the auditor to include new disclosures in the audit report about “critical audit matters” that are identified during the course of the audit. The re-proposal also requires new disclosures about the length of the auditor’s tenure and the applicable auditor independence requirements.
The re-proposal is the latest chapter in a standard-setting project that dates back to … Read more