Wednesday, June 13, 2007
About one-third of Yahoo shareholders voted against the re-election of one or more directors, reflecting dissatisfaction with high executive compensation and poor performance under CEO Terry Semel's tenure. Three proxy advisory firms had recommended no votes against the three members of the compensation committee. The company announced that all directors were re-elected. See NYTimes, Dissident Shareholders Send Message to Yahoo; WSJ, Yahoo Holders Send Message.
Tuesday, June 12, 2007
Excerpts from Remarks at the Fund Governance Forum by SEC Commissioner Paul S. Atkins, New York City, June 7, 2007:
Specifically, I question whether board independence ought to be an end in and of itself. Is it not better to focus on enabling investors to obtain the financial products and services that appropriately fit their investment objectives? Independence may or may not serve that end, but it should not be an end in itself.
Are these rallying cries from putative "investor advocates" on the sidelines reflective of the true concerns of investors? I suspect not. More likely, the average mutual fund investor does not give much thought at all to the degree to which a fund board is independent of the advisor. Prospective investors have many other things to consider in deciding whether and, if so, which mutual fund to purchase.
A recent survey by the Investment Company Institute found that only fifteen percent of mutual fund investors even look at information about the board of directors before investing and only five percent consider this information "very important" to their final investment decision. By contrast, more than three-quarters of investors look at fund fees and expenses and nearly half consider fees and expenses to be a very important factor in their investment decision. Nearly a quarter considered information about the company offering the fund to be very important information to consider before investing. It seems then that investors are not particularly focused on fund boards.
The SEC today announced the panelists and final agenda for the June 19th Roundtable on Rule 12b 1 under the Investment Company Act of 1940. Rule 12b-1 permits mutual funds to use fund assets to pay for the sale of fund shares and other distribution-related activities. The roundtable will consist of panels addressing
the historical circumstances that led to the adoption of Rule 12b-1, and the original intended purpose of the rule;
the evolution of the uses of Rule 12b-1 and the rule's current role in fund distribution practices;
the costs and benefits of the current use of Rule 12b-1; and
the options for reform or rescission of Rule 12b-1.
North American Securities Administrators Association (NASAA) filed a brief on the side of investors in Stoneridge Investment Partners v. Scientific-Atlanta and Motorola, the case addressing the issue of "scheme liability" under Rule 10b-5. Its brief is available at its website.
NYSE Regulation, Inc. announced on June 11 it has censured and fined J.J.B. Hilliard, W.L. Lyons, Inc. (âHilliard Lyonsâ), a member firm, $1 million in connection with the sale of unregistered securities through a private placement that did not qualify for exemption under the federal securities laws. The firm was also cited for using offering documents that contained material misrepresentations and/or omissions of facts, unsuitable sales to public investors, and supervisory, record-keeping and other violations. NYSE Regulation also required Hilliard Lyons to make restitution to customers and to enter an undertaking to notify the NYSE of its supervisory systems and controls (that includes a CEO certification) in the event the firm re-enters the private placement business.
The Justice Dept. did not meet the Monday midnight deadline for filing an amicus brief in favor of the investors in the case scheduled for argument before the Supreme Court next term on the question of "scheme liability" under Rule 10b-5(Stoneridge Investment Partners v. Scientific-Atlanta and Motorola, 06-43). The SEC, by a 3-2 vote, requested the Solicitor General to do so; the Treasury Dept., under Secretary Paulson, took the contrary position. Briefs for the defendants are not due until next month, so it remains unclear whether the Justice Dept. will take a position or remain silent. See WSJ, U.S. Lets Pass Deadline to Back Shareholders in High Court Case.
TheStreet.com cancelled a "Beat the Street" stock-picking competition because it said some of the contestants had “employed trading strategies to achieve returns that could not be duplicated in the real world, thereby depriving other contestants of an equal chance to win.” The $100,000 prize money will go into the pot for the next contest. TheStreet reported similar problems with an earlier competition with a $1 million prize. See NYTimes, Cheating Leads TheStreet.com to Cancel an Investing Contest.
The Blackstone Group's IPO will take place in the next few weeks; one of the largest private equity firms plans to sell 133.3 million shares at a price expected between $29-31. In the registration statement filed yesterday with the SEC, the founders' expected returns from the IPO were disclosed, ,and the numbers are mind-boggling. Stephen Schwartzman will cash out a maximum of $677.2 million and will retain a 24% interest in the company that will be valued at $7.7 billion (assuming an IPO price of $30). Last year he earned $398.3 million. Peter Paulson will receive $1.9 billion from the IPO and retain a 4% interest valued at $1.3 billion. He earned $212.9 million last year. See NYTimes, Blackstone Founders Prepare to Count Their Billions; WSJ, How Blackstone Will Divvy Up Its IPO Riches.
Monday, June 11, 2007
Excerpt from Remarks Before the PLI Hedge Fund Conference, by SEC Commissioner Annette L. Nazareth, New York, New York, June 6, 2007:
As hedge funds' importance to financial markets increases, their potential systemic impact also increases. I'd like to highlight two areas of current concern for regulators. One is whether the transfer of risk from banks and securities firms to hedge funds and other counterparties has been complete and irreversible (or is otherwise covered by adequate collateral) so that banks and securities firms are protected from potential counterparty failure. The second concern is whether any counterparty has grown so large in absolute terms, or accumulated an exposure so significant relative to the overall market, that a destabilizing event forces a broad scale unwinding of positions and otherwise disrupts the markets.
On June 8, the SEC issued an Order Instituting Administrative Proceedings Pursuant to Rule 102(e)(3)(i) of the Commission's Rules of Practice, Making Findings and Imposing Remedial Sanctions (Order)against Raymond L. Mathiasen, CPA. The Order finds that Mathiasen, as the chief accounting officer for Tenet Healthcare Corporation, participated in a fraudulent scheme , in which Tenet filed misleading disclosures with the Commission that failed to disclose the material impact that Tenet's increases in gross charges were having on the company's Medicare outlier revenue, and thereby on its earnings. The Order suspended Mathiasen from appearing or practicing before the Commission as an accountant. Mathiasen consented to the issuance of the Order without admitting or denying any of the findings in the Order. IN THE MATTER OF RAYMOND L. MATHIASEN, CPA.
Yahoo's annual meeting is this Tuesday, and shareholder dissatisfaction is expected over the high compensation package of CEO Terry Semel -- in 2006, it was valued at $71.6 million -- and the poor results in recent years, exacerbated by the success of its rival Google since going public three years ago. Yahoo requires directors who do not receive a majority vote to submit resignations to the board for its consideration. Three advisory firms recommend against reelection of the three directors on the compensation committee. See WPost, Yahoo CEO to Face Shareholder Backlash.
GE and Microsoft considered making a joint bid for Dow Jones, but discussions with Bancroft family representatives broke down over a week ago, because the economics did not work -- the companies could not see meeting or exceeding Murdoch's $60 per share bid. See NYTimes, NBC Studied Dow Jones Bid With Microsoft; WSJ, GE, Microsoft Discussed Buying Dow Jones.
Sunday, June 10, 2007
The Second Circuit recently revisited the difficult issue of pleading a "group" for purposes of Section 13(d) in reversing a district court's dismissal of plaintiff's Section 16(b) claim seeking disgorgement of short-swing profits and also examined the final sentence of section 16(b) (which states that the section does not apply if the person is not a beneficial owner at both ends of the transaction). In dismissing the complaint, the Second Circuit held, the court improperly gave too much weight to defendants' disclaimer of "group" status in their SEC filings and misconstrued the meaning of the final sentence of Section 16(b). The Second Circuit did agree with the district court that a member of the alleged group could not be held liable under Section 16(b) where there were no allegations that it profited from any stock transactions during the relevant time period. Roth v. Jennings, 2007 WL 1629889, 2d. Cir. June 6, 2007.
EMR had purchased about 14.8% of shares in MMI; shortly thereafter, Jennings purchased about 8.3% of MMI stock with funds borrowed from EMR. Jennings sold some of his shares in the open market within a six-month period, and, because he was not himself a statutory insider, 16(b) liability turned on whether he and EMR were a group under section 13(d). SEC filings disclosed the loan agreement and also disclaimed group status. The district court, in granting defendants' motion to dismiss, gave two principal reasons: (1) Plaintiff did not allege any facts that contradicted defendants' disclaimer, and (2)Defendants' uncontradicted evidence showed that EMR and Jennings were not a group at the time of the sales because Jennings had refused to sell his shares to EMR, instead selling them in the open-market, exactly the opposite, the court said, from what a group member would have done.
The Second Circuit essentially found that the district court overstepped its bounds on dismissing the complaint as to Jennings and improperly resolving issues of facts against the plaintiff at the pleading stage. Contrary to the district court's reasoning, determination of "group" status depended on the application of the law to the defendants' activities, not on defendants' legal characterization of their activities. A jury might find that the loan agreement between Jennings and EMR established a "group," notwithstanding the parties' disclaimer. In addition, the final sentence of Section 16(b) did not require coordinated activity among the group members at both ends of the transactions; thus, the court's analysis of the parties' actions at the time of Jennings' sales was both legally irrelevant and also constituted additional impermissible fact-finding.
The Second Circuit did agree with the district court that the complaint should be dismissed against EMR since there were no allegations that it sold any of its shares and profited in any way from Jennings' sales. Under these circumstances, there were no profits for EMR to disgorge.
Hedge Fund Activism, Corporate Governance, and Firm Performance, by ALON BRAV, Duke University - Fuqua School of Business; WEI JIANG, Columbia Business School - Finance and Economics Division; FRANK PARTNOY, University of San Diego - School of Law; and RANDALL S. THOMAS, Vanderbilt University - School of Law; Vanderbilt University - Owen Graduate School of Management, was recently posted on SSRN. Here is the abstract:
Using a large hand-collected dataset of hedge fund activism in the U.S. over the period 2001 through 2005, we find that activist hedge funds act both as value investors and shareholder advocates. They target undervalued firms, and propose an array of strategic, operational, and financial remedies. Most tactics are non-confrontational, and attain success or partial success in two-thirds of the cases. However, hedge funds seldom seek control of target companies. The market reacts favorably to hedge fund activism, as the abnormal return upon announcement of potential activism is in the range of 5-7 percent, with no apparent reversal in the subsequent year. We show that this positive market reaction does not reflect anticipated wealth transfers from creditors to shareholders, but instead reflects anticipated improvement in performance. Indeed, target firms see moderate improvement in operational performance and considerably higher CEO turnover after activism. Our analysis provides important new evidence on the mechanisms and effects of informed shareholder monitoring.
Bebchuk's Case for Increasing Shareholder Power: An Opposition, by THEODORE N MIRVIS, PAUL K. ROWE, and WILLIAM SAVITT (all from Wachtell, Lipton, Rosen & Katz), is posted on SSRN. Here is the abstract:
This paper sets out the view that Lucian Bebchuk's "case for increasing shareholder power" is exceedingly weak. It demonstrates that Bebchuk's proposed overthrow of core Delaware corporate law principles risks extraordinarily costly disruption without any assurance of corresponding benefit; that Bechuk's case is unsupported by any persuasive empirical data; that Bebchuk's premise that corporate boards cannot be trusted to respect their fiduciary duty finds no resonance in the observed experience of boardroom practitioners (perhaps not surprisingly, as the proposal comes from the height of the ivory tower); and that its obsession with shareholder power is particularly suspect (if not downright dangerous) in light of the palpable practical problems of any shareholder-centric approach.
Deconstructing Equity: Public Ownership, Agency Costs, and Complete Capital Markets, by RONALD J. GILSON, by Stanford Law School; Columbia Law School, and CHARLES K. WHITEHEAD, Boston University School of Law, was recently posted on SSRN. Here is the abstract:
The traditional law and finance focus on agency costs presumes, without acknowledgement, that the premise that diversified public shareholders are the cheapest risk-bearers is immutable. In this article, we raise the possibility that changes in the capital markets have called this premise into question, drawn into sharp relief by the recent private equity buying wave in which the size and range of public companies being taken private has expanded significantly.
In brief, we argue that the traditional model's reliance on public shareholders reflects the early stages of corporate risk management and the absence of a liquid market for the transfer of risk. Both have evolved in the last 30 years. In increasingly complete capital markets, private owners can transfer risk in discrete slices to counterparties who, in turn, can manage or otherwise diversify away those risks they choose to forego, arguably becoming a lower cost substitute for traditional risk capital.
If diversified shareholders are no longer the cheapest risk-bearers, then the associated agency costs may now be voluntary; and, if risk management can substitute for risk capital, without requiring a transfer of ownership, then why go public at all? Additionally, in light of the current private equity wave, do more complete capital markets herald (once again) the eclipse of the public corporation? We suggest that, for some, the benefits of public ownership may outweigh the associated agency costs. For others, the ability to transfer risk without transferring ownership may implicate changes in how a firm is (or should be) governed. We offer some preliminary thoughts on the consequences of these changes, suggesting that the line between public and private firms may begin to blur as the traditional balance between agency costs and the benefits of public ownership shift towards a new equilibrium. The article ends with a final question: If, as we anticipate, the opportunity to invest in traditional risk-bearing instruments recedes, by what means will former investors in public equity be able to invest capital?
Sarbanes-Oxley: The Evidence Regarding the Impact of Section 404, by ROBERT A. PRENTICE, University of Texas at Austin - McCombs School of Business, was recently posted on SSRN. Here is the abstract:
Sarbanes-Oxley is the most important securities legislation since the 1930s, and whether it is ultimately considered a success will likely turn on perceptions of its controversial internal controls provision, Section 404. Indeed, whether the law is a success will likely turn on perceptions of 404. SOX 404 has been savagely attacked, especially for its burdensome cost to corporations and its adverse impact on the competitiveness of American capital markets. This article surveys the relevant empirical academic literature. Although that literature does not purport to (and does not) settle the overall question of whether SOX's benefits generally, or SOX 404's specifically, outweigh attendant costs, it does illustrate that the harshest criticisms of SOX are overblown. Importantly, SOX 404 has demonstrably improved corporate financial reporting in the short-term. Its potential for having long-term beneficial impact is largely dependent upon its being perceived as legitimate by capital market participants. At the moment, its legitimacy is being undermined by criticism that ignores much of the important evidence.
Frankly, it was a quiet week. The theme for the past week must be "waiting," as we wait for further developments in two big news stories: (1) Rupert Murdoch's courting of the Bancroft family, and (2) the prosecution of Milberg Weiss and the announcement that William Lerach might retire from his San Diego firm. In addition, we continue to wait for news relating to Rule 10b-5 law at the Supreme Court: the Tellabs opinion and whether the U.S. will take a position, and what it will be, on the Rule 10b-5 "scheme liability" question.