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SOX has No Impact on Foreign Companies Leaving the U.S.

As recently posted on Harvard Law School Forum on Corporate Governance and Financial Regulation, the authors of a forthcoming paper in the Journal of Finance entitled “Why Do Firms Leave U.S. Equity Markets?,” concludes that the market generally reacts negatively when a foreign company deregisters with the SEC and leaves the U.S. equity markets. The study found that deregistered companies are typically poor performers with lower growth opportunities. 

Interestingly, the study found “no evidence that the stock-price reactions to SOX affect the deregistration decision.” In addition, “there is no clear evidence either that foreign-listed firms reacted poorly to the announcement of SOX or that deregistering firms reacted any more poorly than non-deregistering firms.”  Accordingly, “the impact of SOX on a foreign firm is not a major determinant of its decision to leave the U.S.”

The (Welcome) Disappearance of the Corporate Poison Pill

An article in today’s Financial Times (located here) highlights the gradual but ongoing disappearance of the corporate poison pill.  (A “poison pill” is – or was – a common anti-takeover mechanism that gives a company’s shareholders rights to purchase company stock when a hostile bidder acquires a certain percentage of that company’s stock in a takeover attempt.  When the rights are exercised, the target company stock becomes highly diluted, thus making the bidder’s already-acquired stock worth significantly less than its original purchase price.)

 

The problem with the poison pill, from a shareholder’s perspective, is that it allows a company’s board of directors to block a corporate takeover that may be in that shareholder’s best economic interest.  For example, a poison pill might be used by an unscrupulous board of directors that seeks to entrench itself – despite seeing the economic efficiencies of its company being acquired.

 

Not surprisingly, poison pills are not popular with shareholder rights groups.  And such groups have been highly effective recently at dismantling poison pills at many large public companies.  According to the Financial Times, “[o]nly 28 per cent of S&P 1,500 companies had a poison pill in place last year, down from 43 per cent in the previous two years[.]”

 

This trend goes hand in hand with the recent heightened interest in shareholder rights of all kinds.  While increasingly shareholder-friendly lawmakers work hard toward implementing a broad and coherent legislative effort protecting shareholder rights, the dismantling of anti-takeover measures at individual corporations represents a separate – but equally appropriate and effective – effort by corporate governance reform activists to win back corporations for their owners.

SEC Is Failing to Show the Money

According to a new report by the NERA Economic Consulting, the SEC settled with 205 defendants in the first quarter of fiscal year 2010, compared to 181 defendants in the previous quarter and 123 in the first fiscal quarter of 2009. However, although the number of settlements jumped, the average and median monetary settlement amounts were lower in the last quarter than the SEC’s full fiscal year 2009. Specifically, the average monetary settlement for companies in the fiscal first quarter 2010 was $4.7 million, compared to $10.8 million in fiscal year 2009. The median settlement was $0.4 million, compared to $1 million in 2009. Moreover, the proportion of company settlements that included a monetary payment was the third lowest in any quarter since the passage of the Sarbanes-Oxley Act and well below the 56% rate for fourth quarter 2002 through fourth quarter 2009.

From the Pages of The Pomerantz Monitor: Further Evidence of Global Warming: Cracks in Canadian Class Action

As Adam Kurtz reports in the current issue of The Pomerantz Monitor, Canadian courts have recently become far more receptive to shareholder class actions. Now this trend is extending to Canadian antitrust actions. Two Canadian courts – an Ontario trial court and a British Columbia appellate court – recently certified class actions in cases alleging price fixing conspiracies, in violation of antitrust law (called competition law in Canada). Generally, in price fixing cases, the defendant manufacturers (i.e., competitors) are alleged to have agreed amongst themselves on price and/or supply of a product that results in a higher price than would have otherwise been paid in a competitive market. Prior to these two decisions, Canadian courts set a high bar for class certification and were very reluctant to certify class actions. Canadian courts required substantial expert evidence to prove that there was, in fact, a workable methodology to establish both loss and liability on a class-wide basis. Plaintiffs’ expert testimony was rigorously scrutinized and defendants’ expert opinion – that harm could not be shown on a class-wide basis – was commonly adopted. As a result, very few class actions were certified or even brought in Canada, especially compared to the U.S., where courts are known for certifying a wide variety of class actions. 

However, in September 2009, the Ontario Superior Court – in Irving Paper Limited v. Atofina Chemicals – granted certification of a class action alleging a pricing fixing conspiracy by producers of hydrogen peroxide. Although common in the U. S., this was one of the first times that a Canadian court had certified a class of direct and indirect purchasers in an alleged price-fixing conspiracy case. 

Shortly thereafter, in November 2009, the British Columbia Court of Appeal (“BCCA”) – in Pro-Sys Consultants Ltd. v. Infineon Technologies AG (“DRAM”) – overturned a lower court ruling and certified a class action alleging a pricing fixing conspiracy by manufacturers of computer chips, known as Dynamic Random Access Memory, that are in computers and other electronic devices. DRAM is significant because it is the first important appellate decision that deals with class action competition law. 

Together, DRAM and Irving Paper have – for now – lowered the bar for plaintiffs to establish loss and liability on a class-wide basis. In general, in DRAM, the BCCA held that “[t]he provisions of the CPA [Class Proceedings Act] should be considered generously in order to achieve its objectives: judicial economy …; access to justice …; and behavior modification ….” Toward this end, the BCCA further recognized that “[t]he certification hearing does not involve an assessment of the merits of the claim; rather it focuses on the form of the action in order to determine whether the action can appropriately go forward as a class proceeding.  * * * [I]n conformity with the liberal purpose approach to certification, the evidentiary burden in not an onerous one.”    

More specifically, in DRAM, the Court recognized that plaintiff, at this early stage of the litigation, “was required to show only a credible or plausible methodology” to establish loss and liability on a class-wide basis and not the higher standard that the existence of harm must, in fact, be determined. In Irving Paper, the trial court held that plaintiffs need only show that such a plausible methodology "may" exist: “Accordingly, where expert opinion evidence is adduced at the certification stage, … it should not be subjected to the exacting scrutiny required at trial.”   

Restatements Decline

An announcement that a company plans to restate its financial results is often considered an alert to investors that fraudulent conduct may be to blame and frequently causes a significant decline in the company's share price.  Amidst economic crisis, the number of restatements peaked in 2006.  However, as reported by CFO.com, the number and severity of financial restatements fell in 2009 for the third year in a row, according to a new Audit Analytics report. The report attributes the decline in restatements to improved internal controls as a result of the Sarbanes Oxley Act and a 2008 recommendation by the SEC's Advisory Committee on Improvements to Financial Reporting that the agency relax its requirements on what types of errors should trigger restatements.  To read the full article, click here.

Request to Disclose Corporate Political Spending

In wake of the Supreme Court’s recent decision in Citizens United v. Federal Election Commission where it removes most restrictions on corporate political spending, the Center for Political Accountability and the Council of Institutional Investors, joined by nearly 50 institutional investors and shareholder advocate groups have sent letters to companies in the S&P 500 Index to “disclose all political contributions they make with corporate funds.” Institutional investors that co-signed the letter included the California Public Employees’ Retirement System, New York State Common Retirement Fund, New Jersey State Investment Council and Amalgamated Bank.

The letter requests that companies begin to adopt certain best practices in corporate political disclosure and accountability including:

1.    policies and procedures for board approval and review of corporate political spending; and

2.    annual public disclosure of all corporate political expenditures, including contributions made with corporate funds and payments to trade associations and other tax-exempt organizations that are used for political purposes.

Moreover, the Council of Institutional Investors is calling “on boards to monitor, assess and approve company political contributions, and to develop and disclose publicly, on an annual basis, the amounts and recipients of all monetary and non-monetary contributions.”

New Senate Legislation Takes Aim at “Reckless Corporate Practices”

Senator Robert Menendez, a member of the U.S. Senate Banking Committee, introduced legislation last week designed to give public company shareholders an advisory say on executive pay packages.  His Corporate Executive Accountability Act of 2010 meshes well with similar legislation passed by the House last summer.

 

Senator Menendez has put forward numerous reforms to the paradigm that sparked last year’s economic collapse – namely, pay practices that rewarded excessive risk-taking and a widespread short-term focus on immediate corporate profitability.  Specifically, Senator Menendez proposes that:

 

·         Public company shareholders be given non-binding votes on whether to approve proposed executive compensation packages;

·         Public companies disclose the ratio of compensation levels between top executives and “median” employees;

·         Regulators and investors be given the ability to claw back bonuses from executives later found to have been engaged in misconduct;

·         Executives fired for cause be disallowed golden parachute payments; and

·         Executives be limited to cashing out vested equity compensation to a rate of 20% per year over a five-year period.

Senator Menendez believes that his reform proposals will go a long way toward averting financial crises in the future.  He believes that “what everyone has learned all too painfully over the past year and a half is that risky behavior, excesses, and lack of accountability on Wall Street can end up squeezing families on Main Street.  We can’t afford to have short memories and allow the type of reckless corporate practices that got us into this economic mess in the first place to take root all over again.”

We support the Senator’s insistence that “corporate executives must be held accountable” and hope that his proposed legislation – along with other legislative efforts – find their way into a comprehensive reform package that truly prevents the re-rooting of what the Senator correctly identifies as “reckless corporate practices.”

Wide Endorsements by Institutions for the Private Equity Principles

The Institutional Limited Partners Association recently produced the ILPA Private Equity Principles. The document “contains best practice concepts and that speaks to issue relating to the alignment of interest between general partners and limited partners, fund governance and transparency and reporting.” The purpose of the document is to serve as a common framework for discussion between the general partner and limited partner communities to improve the private equity industry for the long-term benefit of all its participants.

Thus far, many organizations and institutional investors have endorsed the ILPA Private Equity Principles including CalPERS, New York City Employees’ Retirement System, State of New Jersey, Division of Investment and Teachers’ Retirement System of the City of New York.

Accordingly, we encourage our readers who invest in limited partnerships to review these principles.

For more information about the ILPA, please click here.

From the Pages of The Pomerantz Monitor: SEC Signals Another Compensation "Clawback" Attempt

After years of inaction, the SEC is apparently now ramping up its efforts to enforce the "clawback" provision of the Sarbanes Oxley Act. The provision allows the recovery of incentive compensation from the CEO and CFO if the financial results on which the awards were based are later restated. After recently suing two retired executives under the provision, the SEC has now sent a “Wells Notice” to the CEO of Beazer Homes USA, telling him that the staff has recommended that proceedings be brought to recover some or all of his incentive pay.

Neither in this case nor in the other two were the targets of the claim accused of any wrongdoing in connection with the misstated financials. The statute itself is silent on whether wrongdoing by the "clawee" is a requirement for a clawback claim. As these cases mount up, it is becoming more and more likely that the courts will have to rule on that issue.

Pension Funds In Favor of Proxy Access

In response to a comment letter submitted to the SEC by the Business Roundtable suggesting that state law should permit companies to decide on whether to amend their corporate bylaws to provide for shareholder access, the executive directors of two pension funds, the State of Wisconsin Investment Board and the Washington State Investment Board firmly rejected that idea. The funds argued that the SEC should not permit companies to be exempted from a proposed rule that will give shareholders proxy access including nominating directors.

The State of Wisconsin Investment Board explained in its letter: “Unless proxy access is adopted at a federal level, shareholders would continue to face restrictions on corporate governance.” Moreover, the fund noted that “access to corporate proxy materials for long-term investors would address some of the problems surrounding director elections. Such access could significantly enhance the U.S. corporate governance model.”

In further support that all companies should comply with the proposed rule, Jonathan D. Urick, of the Council of Institutional Investors also submitted a comment letter saying that from “a practical standpoint, leaving proxy access to Delaware and other states could result in a hodgepodge of standards that would differ from company to company and from state to state. This would be burdensome, costly and unnecessarily complex for investors.”

Click here for article.