On May 12, 2015, the Commodity Futures Trading Commission (“CFTC”) and Securities and Exchange Commission (“SEC”) jointly issued the CFTC’s final interpretation clarifying its interpretation concerning forward contracts with embedded volumetric optionality (“Final Interpretation”). The Final Interpretation appears to signal that, going forward, the CFTC will take a more relaxed view of which transactions constitute “forward contracts” that are not subject to regulation as swaps. This view should be helpful to many commercial parties entering into contracts that provide for volumetric optionality, which means the right to receive or deliver a commodity in an amount that is more or less … Read more
A major criticism of activist hedge funds, and one that allegedly supports the argument that they suffer from short-termism, is that their recommendations almost always focus on disinvestment. For example, they will typically recommend raising the dividend, cutting costs, spinning off divisions or subsidiaries or preparing the company for sale. Since we should expect activist hedge funds to be indifferent to the types of recommendations they make as long as they believe the recommendations will result in the highest possible stock price, then why do these recommendations seem to be so heavily biased in the direction of disinvestment?
One … Read more
The debate over asset managers’ potential systemic risk has been ongoing for some years, with little agreement between the industry, US regulators, and global standard setting bodies. US regulators themselves have been divided – the SEC has in particular been skeptical that asset managers or individual funds can be the source of systemic risk of a magnitude akin to that posed by large banks.
Nevertheless, consensus is finally forming on the need to address specific risks of the industry. With the designation of asset managers as systemically important financial institutions (“nonbank SIFIs”) by the Financial Stability Oversight Council (“FSOC”) now … Read more
Our manuscript titled “The impact of governance mandates on the evolution of firm value and governance culture” contributes to the growing literature that uses quasi-exogenous shocks to equilibrium governance practices to examine important firm outcomes. We specifically examine whether and how changes to the NYSE and NASDAQ corporate governance listing standards that were motivated by provisions of the Sarbanes-Oxley legislation relate to two important firm outcomes. One outcome is long-term firm value and the other is our new notion of a firm’s “governance culture” measured using the firm’s non-mandated governance practices. This new notion of a governance culture … Read more
On May 12, 2015, the staff of the Financial Industry Regulatory Authority (FINRA staff) issued an interpretive letter to Hartford Funds Distributors, LLC (Hartford Funds) that conditionally allows distributors of mutual funds to include certain types of related performance information in communications with institutional investors, including registered broker-dealers and investment advisers.1 In other words, mutual fund distributors for the first time may include related performance information in sales literature when selling or recommending mutual fund shares to institutional investors and communicating with financial intermediaries.
FINRA Rule 2210 generally governs communications with the public. Paragraph (d) of the rule includes … Read more
Due to a recent Delaware Chancery Court ruling, the topic of director compensation currently is facing an uncharacteristic turn in the spotlight. Though it receives relatively little attention compared to its higher-profile cousin—executive compensation— director compensation can be a difficult issue for boards if not handled thoughtfully. Determining the appropriate form and amount of compensation for non-employee directors is no simple task, and board decisions in this area are subject to careful scrutiny by shareholders and courts.
The core principle of good governance in director compensation remains unchanged: Corporate directors should be paid fair and reasonable compensation, in a mix
On May 14, 2015, the Delaware Supreme Court issued its decision in In re Cornerstone Therapeutics Inc., S’holder Litig., clarifying that damages claims against independent directors can be dismissed where: (1) an applicable exculpatory charter provision exists; and (2) a plaintiff fails to plead a non-exculpated claim against them, regardless of the applicable standard of review. That is, independent directors will not automatically be required to remain defendants in a litigation simply because, for example, the challenged transaction was with a controlling stockholder. Rather, plaintiffs must state facts sufficient to support an inference of disloyalty against independent directors themselves.… Read more
On November 3, 2014, the board of directors of Cogent Communications Holdings, Inc., a publicly traded internet-service provider incorporated in Delaware, amended Cogent’s bylaws to include two new provisions. One was a forum-selection provision designating Delaware as the exclusive forum for derivative actions and other claims involving internal corporate matters. The other was a so-called “fee-shifting” bylaw requiring any stockholder who asserts “any claim … against the Corporation and/or any director, officer, [or] employee” and does not obtain a judgment on the merits that “substantially achieves… the full remedy sought” to reimburse any costs the corporation incurred defending the suit … Read more
On April 29, 2015, the Securities and Exchange Commission (“SEC”) proposed rules that would apply certain aspects of its security-based swap regulations (when they become effective) to transactions involving non-US parties that are arranged or executed using US personnel or agents.
The proposed rules weigh in on a controversial issue concerning the scope of US regulation—the extent to which US rules apply to transactions that would otherwise be outside of US jurisdiction, but which are effected using US personnel. The SEC’s proposal follows in the wake of, and is similar in certain respects to, an advisory published by the … Read more
The European Commission, in its green paper dated February 18, 2015, announced the “need to build a true single market for capital – a Capital Markets Union for all 28 Member States.” One of the goals of the Capital Markets Union is to unlock more investment for small and medium sized enterprises (“SMEs”). SMEs are Europe’s equivalent to startups and small businesses in the United States. At present, small businesses in Europe receive five times less funding from the capital markets than their American counterparts. So, the European Commission is looking for feedback from those who work in … Read more
On April 30, 2015, the Commodity Futures Trading Commission (“CFTC”) approved for publication in the Federal Register proposed amendments to the trade option exemption (the “Proposal”) that would reduce reporting and recordkeeping requirements for trade option counterparties that are not swap dealers or major swap participants (“Non-SD/MSPs”). Notably, the Proposal would eliminate the annual Form TO filing requirement for Non-SD/MSPs in connection with their trade options, while requiring them to notify the CFTC’s Division of Market Oversight (“DMO”) if their trade options have, or are expected to have, an aggregate notional value in excess of $1 billion in any calendar … Read more
In a recent post, Some Lessons from DuPont-Trian, Martin Lipton identified shareholder voting in a proxy contest as a problem with hedge fund activism. According to Mr. Lipton, “ISS and major institutional investors will be responsive to and support well-presented attacks on business strategy and operations by activist hedge funds on generally well managed major corporations, even those with an outstanding CEO and board of directors.” My interpretation of this statement is that voting for a slate of hedge fund nominees that goes against the recommendations of a well functioning board of directors (Board) is the wrong vote … Read more
The AIG decision (actually, Starr International Co. v. The United States) has shocked many but for the wrong reason. Some commentators have focused on the ingratitude of Maurice Greenberg, AIG’s former CEO and the “architect” of its international insurance business. In their view, he should have been thankful for the $85 billion loan extended by the Federal Reserve Board (which still left AIG’s shareholders holding 20% of their stock). Ultimately, AIG’s shareholders did much better than their Lehman counterparts (who received nothing), but these issues of comparative fairness and Greenberg’s alleged chutzpah go mainly to the cosmetics and … Read more
Financial advisors often are selected by a board of directors (or committee thereof) to advise on a strategic review process because of their role as brokers in the market and their ability to generate transactional activity. Of course, that role and ability is dependent upon relationships with potential counterparties to a transaction. Because financial advisors are hired in part to exploit their relationships with potential counterparties, inevitably conflicts of interest will arise. Delaware law clearly permits directors to make a decision that the benefits of engaging a particular financial advisor (including, in many cases, that financial advisor’s contacts in the … Read more
On May 12 and June 11, 2015, the Delaware Senate and House of Representatives, respectively, passed a bill (the “Bill”) that would amend Title 8 of the Delaware General Corporation Law (“DGCL”) to prohibit Delaware stock corporations from including in their charters or bylaws so-called “loser-pays” fee-shifting provisions in connection with “internal corporate claims” brought by stockholders. Following the Delaware Supreme Court’s May 2014 decision in ATP Tour, Inc. v. Deutscher Tennis Bund, in which the Court held that “fee-shifting provisions in a non-stock corporation’s bylaws can be valid and enforceable,” it was unclear to some practitioners … Read more
On April 28, 2015, the Securities and Exchange Commission (“SEC”) announced that it awarded the maximum allowable award to a whistleblower under the Dodd-Frank whistleblower program in its first case involving alleged retaliation by an employer against an employee who reported suspected misconduct to the SEC. This award of 30 percent of the amount collected by the SEC in In the Matter of Paradigm Capital Management, Inc. and Candace King Weir equaled a payment of more than $600,000 to the employee who, according to the SEC, provided “key original information that led to the successful SEC enforcement action.”
In … Read more
The SEC’s Division of Enforcement has issued guidelines explaining the factors it will consider in determining whether to bring enforcement actions as administrative or judicial proceedings. The SEC recently has been criticized for its increased use of administrative proceedings to resolve novel applications of the securities laws. In the newly issued guidance, the Division identified a non-exhaustive list of four factors that the Division may consider in determining the proper forum for an enforcement action, but the Division also made clear that the circumstances of each particular case will ultimately govern where the case is brought. The Division reiterated its … Read more
Entrepreneurship is widely viewed as socially beneficial because it lifts employment and grows the economy, among other reasons. Teenage entrepreneurship—that is, where teenagers organize and manage startup companies of their own—can be particularly valuable because teenagers have a special knack for creating revolutionary, new types of businesses. Consider that Bill Gates founded Microsoft, and Mark Zuckerberg founded Facebook, both as teenagers.
This phenomenon of the teenage entrepreneur originated in the 1970s. Prior to that time, the so-called “infancy” doctrine of contract law prevented anyone under the age of twenty-one from starting a business. But then came Vietnam, which changed everything. … Read more
Despite losing several high-profile cases, the U.S. Securities and Exchange commission (SEC) has committed itself to prosecuting insider trading, outlawed by a patchwork of rule-making and court decisions. In recent years, the SEC has filed record-numbers of insider trading actions, totaling hundreds of cases. To increase the success of these prosecutions, much attention has focused on shoring up the legal framework on insider trading, described by many as ambiguous. However, attention should also be paid to how to catch insider trading based on an empirical analysis of insider trading.
This is the subject of our new article, which provides … Read more
On May 4, 2015, Vice Chancellor Travis Laster of the Delaware Court of Chancery issued an opinion providing a thoughtful analysis of when the creditors of an insolvent corporation have the right to bring derivative claims, such as those alleging breach of director fiduciary duties. In Quadrant Structured Products Co., Ltd. v. Vertin, the Court examined a question of first impression under Delaware law: whether that law imposes a continuous insolvency requirement for creditors to maintain standing to bring derivative claims against a corporation. The Court began its analysis with a discussion of the nature of a creditor’s … Read more