May 2, 2007
Increasingly Boards Look Within for New Leadership
Increasingly, boards are hiring new CEOs from within the corporate ranks, instead of looking outside. In 2005 40% of CEOs hired by S&P 500 companies were from the outside, in 2006 the percentage dropped to 15%, and in the first quarter 2007 only 1 of 8 positions was filled by an outsider. Why? Less cost, less surprise, and increasingly boards consider succession planning part of their responsibility. See WSJ, Directors Now Prefer Insiders In Search for CEOs.
More on Murdoch's Bid for WSJ
The big news today is Rupert Murdoch's surprise offer to buy the Wall Street Journal, although the basic information was released yesterday afternoon. The offering price of $60 reflects a 67% premium over market. Although there is speculation that other bidders will come forward, that high opening bid would discourage some. The bid was first received about two and a half weeks ago, and the Bancroft family, who own 27.7% of the stock but have 64.2% of the voting power, did not initially reject it, as they have other offers in the past. The statement released yesterday said that "slightly more than one-half" the voting power would oppose the deal. Murdoch described his offer as "friendly." See NYTimes, Rupert Murdoch Offers $5 Billion Bid for Dow Jones; WSJ, Murdoch's Surprise Bid:$5 Billion for Dow Jones.
Cablevision and Dolans Near Buyout Deal
Cablevision and its controlling shareholders, the Dolan family, are reaching agreement to sell the company to the Dolans for about $10.5 billion in cash, or $36 per share. In the past three years, a special committee of the board turned down several offers by the Dolans because the price was too low. See NYTimes, Cablevision Nears Deal With Dolans; WSJ, Cablevision Nears Deal With Dolans
To Go Private for at Least $10.5 Billion.
May 1, 2007
May 7 SEC Open Meeting on Proxy Rules
The subject matter of the SEC Open Meeting scheduled for Monday, May 7, 2007 will be:
The Commission will hold a roundtable discussion regarding shareholder rights and the federal proxy rules. The discussion will address the federal role in upholding shareholders' state law rights, the purpose and effect of the federal proxy rules, non-binding proposals under the proxy rules, and binding proposals under the proxy rules.
Murdoch Makes Bid for Dow Jones
Rupert Murdoch's News Corp. has made an unsolicited $5 billion offer to buy Dow Jones & Co., the parent of the Wall St. Journal. While reportedly shares representing a majority of the voting power are opposed to the offer, it is not clear if they are opposed to a buyout, a buyout from Murdoch, or the price (which, at $60 per share, is a hefty premium over market). This should get interesting. See WSJ, Murdoch's News Corp. Makes $5 Billion Bid for Dow Jones.
P.S. A WSJ blog also reports heavy unexplained trading in Dow Jones options in recent weeks. See WSJ, A Preannouncement Leak for Traders of Dow Jones Options?
"Gain on Sale" Accounting at Subprime Lender
The role of funny accounting in the demise of New Century Financial, the subprime mortgage lender now in bankruptcy, is analyzed in the New York Times article today. "Gain on sale," which achieved notoriety in Enron, reports profits before they actually exist and may be used to hide losses. See NYTimes, Accounting Said to Hide Lender Losses.
Latest in Icahn's Campaign for Motorola Seat
Carl Icahn stepped up his campaign for a seat on the board of Motorola with a full-page ad addressed to shareholders sharply critical of CEO Ed Zander's performance. The shareholders' meeting is set for next Monday, and the proxy advisory firms are split on whether to vote for Icahn. See WSJ, Icahn Bid for Motorola Seat Takes More Critical Tone.
Private Equity Firm Considers Sale of 20% Stake
Another private equity firm is considering selling a piece of itself, taking advantage of what Henry Kravis recently described as private equity's "golden age." In this case, TPG (which is a partner in the buyout of Texas utility TXU Corp.) is reportedly in talks with several large penson funds to sell up to 20% of the firm. Maybe a first step to an IPO? See WSJ, TPG Considers Selling 20% Stake, With Pension-Fund Twist.
Federal Court Rejects Raines' Request to Take Case
Remember Franklin D. Raines, the Chair of Fannie Mae during the time period when it was "managing" its earnings? The industry oversight agency, the Office of Federal Housing Enterprise Oversight, is set to start its hearing against him in March to recover $84.6 million in compensation plus penalties. The D.C. appellate court rejected Raines' request to transfer the proceeding to federal court on the ground that the regulator was biased against him. See WPost, Fannie Mae's Former Chief Loses Plea To Move Case.
April 30, 2007
Settlement In Action Against Former Tyco Officer
The Commission today announced that it had submitted to the U.S. District Court for the Southern District of New York a proposed settled Final Judgment as to Defendant Edward Federman, in the Commission's previously filed civil injunctive action against Federman and two other former executives of Tyco International Ltd. The proposed settlement is based on the allegations in the Commission's complaint concerning Federman's involvement in fraudulent accounting practices at Tyco in violation of the federal securities laws. Without admitting or denying the allegations in the Commission's complaint, Federman consented to the entry of a final judgment that would permanently enjoin him from violating the corporate record-keeping provisions of the federal securities laws and from aiding and abetting violations of the antifraud, periodic reporting, and corporate record-keeping provisions. The proposed final judgment would also order Federman to pay disgorgement in the amount of $1,651,064, plus prejudgment interest thereon in the amount of $799,693.10, and a civil penalty in the amount of $200,000. Finally, pursuant to the proposed final judgment, Federman would be barred from serving as an officer or director of a public company for a period of five years. Edward Federman was, from 1999 until his resignation in January 2001, the Executive Vice President and Chief Financial Officer of Tyco's Electronics division.
ALJ Revokes Registration of Impax Labs Stock
An administrative law judge has issued an Initial Decision in the matter of Cosmetic Center, Inc., et al. finding that Impax Laboratories, Inc. (Impax) has violated Section 13 of the Securities Exchange Act of 1934 and Exchange Act Rules by repeatedly failing to file required periodic reports. The administrative law judge rejected Impax's arguments that unique circumstances prevented it from filing the required reports and that sufficient information was available to the public. The Initial Decision finds that it is necessary and appropriate for the protection of investors to revoke the registration of each class of Impax's registered securities. (Initial Decision No. 329; File No. 3-12519)
Traders Charged With Manipulation in Stock Buyback
Following a joint investigation, NASD and the Chicago Stock Exchange (CHX) today announced fines and suspensions against two traders for artificially inflating the price of the stock of Material Science Corporation (MSC), a New York Stock Exchange-listed company, in connection with MSC's repurchase of its stock. NASD imposed a $25,000 fine and a three-month suspension on Klaus Offenbacher, a trader with NASD-registered First Analysis Securities Corporation of Chicago. Offenbacher is receiving credit for a 60-day suspension already imposed by his employing firm. CHX imposed a $20,000 fine and a two-month suspension on Bruce Kaminski, a floor broker with Dougall & Associates of Chicago, a CHX Participant firm.
The regulators' joint investigation found that Offenbacher was responsible for repurchasing MSC stock on behalf of the issuer pursuant to the company's stock repurchase program. MSC wanted its repurchases to fall within the safe harbor provision of the Securities and Exchange Commission's (SEC) rule governing issuer buy-backs, which provides that issuer purchases cannot be the opening purchase of the day and cannot exceed the highest independent bid or last independent transaction price.
The regulators found that on Aug. 21, 2006, Offenbacher received authorization from MSC to repurchase 100,000 shares of MSC stock pursuant to the repurchase program. The same day, Offenbacher located an institutional customer willing to sell a 174,300-share block of MSC stock with a limit price of $9.90. Later that day, Offenbacher attempted to contact the principals of MSC to get approval to purchase the entire block. MSC stock closed that day at a price of $9.80 per share. Early the following day, Offenbacher received approval from MSC's principals to purchase the block at $9.90 per share. Before the market opened, Offenbacher directed Kaminski to purchase 1,000 shares of MSC stock at $9.90 per share, in the event MSC opened below $9.90 per share. When MSC opened at $9.75 per share, Kaminski executed the 1,000 share transaction at $9.90 per share which artificially drove the stock's price up 15 cents to the level Offenbacher needed to execute the cross trade.
Kaminski's execution of the 1,000-share transaction on the New York Stock Exchange established an artificial reference price at which the larger block transaction was then executed on the CHX. As a result, the regulators found that Offenbacher and Kaminski knowingly and intentionally artificially increased the market price of MSC stock in an attempt to make it appear that the purchase fell within the SEC's safe harbor provision for issuer buy-backs. Both individuals settled without admitting the charges. See NASD and Chicago Stock Exchange Fine and Suspend Traders for Cross-Market Manipulation
Is There Too Much Hope?
In a WSJ commentary, Burton Malkiel warns of "irrational complacency" and wonders if securities prices are overpriced in the face of the substantial risks to the market and world economy. His practical advice -- review your asset allocation and consider rebalancing your portfolio. See WSJ, Irrational Complacency?
Too Much Debt?
Are more Long Term Capital Management collapses in the future? The Wall St. Journal calls it the "leverage binge" and reports that regulators are worried because Wall St. is lending lots of money to hedge funds without the controls that are required in extending credit to brokerage firms and other regulated entities. See WSJ, OUTER LIMITS As Funds Leverage Up, Fears of Reckoning Rise.
April 29, 2007
Wang and Steinberg on Insider Trading
Two chapter from the new edition of Insider Trading (PLI 2d ed. 2006), by WILLIAM K.S. WANG, University of California, Hastings College of the Law, and MARC STEINBERG, Southern Methodist School of Law, are posted on SSRN. Here is the abstract:
This paper is the Introductory chapter to Insider Trading (PLI 2d ed. 2006). Insider Trading is a two-volume treatise that analyzes the application of various laws to stock market insider trading and tipping. Among the federal laws are Exchange Act section 10(b), SEC rule 10b-5, mail/wire fraud, SEC rule 14e-3, Exchange Act section 16, and Securities Act section 17(a),. The state laws discussed are the common law, the Uniform Securities Act, and the California and New York securities statutes.
Another chapter addresses government enforcement of the insider trading/tipping prohibitions. A chapter on compliance programs deals with how firms can try to prevent illegal insider trading and tipping. Two chapters compare the harmful and allegedly beneficial effects of stock market insider trading and discuss the harm to individual investors from each specific insider trade.
Brown on Corporate Governance and SEC
Essay: Corporate Governance, the Securities and Exchange Commission, and the Limits of Disclosure, by J. ROBERT BROWN Jr., University of Denver Sturm College of Law, was recently posted on SSRN. Here is the abstract:
This article explores the role of the Securities and Exchange Commission in the corporate governance process. Traditionally, most have viewed substance as a matter for the states and disclosure for the Commission. This “neat” dichotomy has been long accepted but little examined.
The Commission was always meant to play a role in the governance process. Congress assigned to the SEC the authority to regulate disclosure in part to prevent various abusive practices by management, including the payment of excessive compensation and self perpetuation. Disclosure largely eliminated secrecy but did end self interest. Instead, pressure built on states to loosen substantive standards. Disclosure, therefore, contributed to the continued decline in substantive standards under state law.
With the link between substantive standards and accurate disclosure increasingly apparent, the Commission began to intervene into the governance process more directly, employing disclosure as a mechanism designed to alter the behavior of officers and directors. The approach, however, didn't work particularly well. Disclosure couldn't entirely compensate for the declining substantive standards under state law.
These dynamics have changed significantly with the adoption of Sarbanes-Oxley. The Commission has now become more overtly involved in the governance process. The impact of these changes have yet to be fully realized but they contain the potential for a profound shift in the traditional approach to corporate governance.
Cremers and Romano on Mutual Fund Voting Disclosure
Institutional Investors and Proxy Voting: The Impact of the 2003 Mutual Fund Voting Disclosure Regulation, by MARTIJN CREMERS, Yale School of Management, and ROBERTA ROMANO, Yale Law School; National Bureau of Economic Research (NBER), was recently posted on SSRN. Here is the abstract:
This paper examines the impact on shareholder voting of the mutual fund voting disclosure regulation adopted by the SEC in 2003, using a paired sample of proposals submitted before and after the rule change. We focus on how voting outcomes relate to institutional ownership and the voting behavior of mutual funds. While voting support for management has decreased over time, there is no evidence that mutual funds' support for management declined after the rule change, as expected by advocates of disclosure. In fact, in the context of management-sponsored proposals on executive equity incentive compensation plans, mutual funds appear to have increased their support for management after the rule change. We also find that this result is not due to changes in compensation plan features, nor that voting outcomes were plausibly related to broker voting, which was eliminated in a parallel 2003 stock exchange rule change. Finally, there is some evidence that firms with greater mutual fund ownership adopt a higher frequency of sponsoring executive equity incentive compensation plans, which could partly explain our findings.
Wintoki on SOX and Exchange Listing Requirements
Corporate Boards and Regulation: The Effect of the Sarbanes-Oxley Act and the Exchange Listing Requirements on Firm Value, by M. BABAJIDE WINTOKI, Terry College of Business, University of Georgia, was recently posted on SSRN. Here is the abstract:
The Sarbanes-Oxley Act of 2002 and recently modified exchange listing requirements impose uniformly high levels of outside director monitoring on all firms. However, recent research in finance suggests that corporate governance structures, including boards of directors, are chosen endogenously by firms in response to their unique operating and contracting environments. Using the relative costs and benefits of outside director monitoring as a benchmark, I find significant cross-sectional variation in the wealth effects around the announcement and passage of these regulations. I find that firms which have high monitoring costs and fewer benefits from outside monitoring benefited less from the regulations. In particular, I find that the wealth effects around the passage of these new regulations are positively related to firm size and age, and negatively related to growth opportunities and the uncertainty of the firm's operating environment. The results suggest that a blanket one size fits all governance regulation may be detrimental to certain firms, particularly young, small, growth firms operating in uncertain business environments, that are costly for outsiders to monitor.
Perspective on The Past Week's Stories
The big news for law professors and corporate attorneys is the SEC's complaint charging Nancy Heinan, former GC at Apple, with securities fraud for backdating stock options. The complaint focuses on two stock option grants. One involved the grant of 4.8 million options to six executives (including Heinan and Anderson, the former CFO who settled with the SEC). According to the complaint, in late January Heinan provided Steve Jobs with a list of daily closing prices for Apple stock for the month of January and suggested a date for the stock option grant. The complaint does not allege that Jobs responded to this, but alleges that on February 1 Heinan told Anderson that Jobs had agreed on a date of January 17. Heinan then allegedly directed her staff to prepare an unanimous written consent showing board approval of the grant on January 17. The other grant involved 7.5 million options to Jobs that was finalized on December 18, 200, after months of negotiations over the vesting schedule, and then backdated to October 19. The complaint alleged that Heinan created fictitious minutes for a special board meeting on October 19.
On the same day that the SEC charged Heinan and settled with Anderson, Anderson released a statement through his attorney in which he stated that in late January he advised Jobs about the accounting implications of backdating and charged that Jobs misled him by telling him the board had earlier approved the grant. Apple has previously said that Job helped in selecting option grant dates, but did not understand the accounting issues.
Another significant settlement -- outside directors of Just For Feet settled misrepresentations, conflict of interest, breach of fiduciary duty and bad faith claims with the bankruptcy trustee for $41.5, reportedly the largest settlement by outside directors. The company failed in 1999 because of an accounting fraud.