Capital Markets

Corporate Law: Firm Advice

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on

This is the first in a series of posts rounding up firms’ advice on corporate law.

  • California has a new private fund adviser exemption. The Dodd-Frank Act eliminated a similar federal exemption.  California has followed suit by limiting exemption from California’s “investment adviser registration requirements for advisers to only ‘qualified private funds.’”  What are “qualified private funds”?  Morrison & Foerster has the full update in their recent client alert.
  • How standardized should credit ratings be? Not much more than they already are, so says a recent SEC study prepared for Congress as part of the implementation of the Dodd-Frank Act.  Instead, the SEC suggests efforts would be better spent on increasing transparency of ratings methodologies and performance.  Goodwin Proctor has a full summary of the study in its financial services alert.
  • What’s your number? For a breakup fee in an M&A deal that is. The size of the deal and market precedent are a good place to start. But choosing an amount in advance that will comply with courts’ requirement that the amount not “be preclusive of a true superior proposal” can be difficult. Kirkland & Ellis has advice on picking your number.

Bill Falik Speaks About a Controversial New Plan to Fix the Mortgage Crisis

By Ana Amodaj, J.D. Candidate 2014, UC Berkeley School of Law | Posted on

On Thursday, September 6, Berkeley Law Adjunct Professor Bill Falik gave a presentation on his pioneering efforts to stabilize the mortgage market and prevent future foreclosures through the government’s use of eminent domain.

Having expertise in real estate, land use and development, Bill Falik started thinking about ways to stop the deterioration of the housing market after one of his housing developments in Roseville, CA was hit by a wave of foreclosures. “A group of us got together and started thinking about creative approaches to resolving the mortgage crisis and stopping foreclosures”, says Falik about the founding of Mortgage Resolution Partners (MRP), an organization seeking to implement this innovative strategy as a way to keep homeowners in their homes.

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The SEC’s Limit Up – Limit Down Rule Can Help Markets, But Does It Go Far Enough To Address High-Frequency Trading?

By Andrew Siosin, J.D. Candidate 2013, UC Berkeley School of Law | Posted on

The BATS IPO was an ironic disaster. BATS, a stock exchange that billed itself as the future of stock trading, botched the IPO of its own stock, which was supposed to be listed on the BATS exchange beginning March 23rd. According to the company, the failure was caused by a software bug, and not by high-frequency trading algorithms, as some have speculated. Not only did the failure cause BATS to abandon its own IPO, it also rattled shares of Apple, mirroring the events of the 2010 Flash Crash.

While the IPO was an embarrassment for BATS, it put the SEC’s regulatory response to the Flash Crash on display. The 2010 Flash Crash was a series of events that caused the Dow Jones Industrial Average to plummet more than 700 points in a matter of minutes, only to recover within a half hour. In response to the Flash Crash, single stock circuit breakers were established to curb the effects of extreme market volatility. By most accounts, single stock circuit breakers have been effective in restoring order to markets after numerous test runs during other “mini flash crashes,” hitting a high of 51 in December of 2011.

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Second Circuit Set to Reign in Rakoff

By Peter Benesch, J.D. Class of 2013 | Posted on

On March 15, the Second Circuit stayed proceedings in the now notorious case of SEC v. Citigroup. The case hit headlines last November when District Court Judge Rakoff refused to accept a $280 million settlement agreement between the SEC and Citigroup. Judge Rakoff’s decision was outlined in great detail in a previous post on the Network.

By granting a stay in the proceedings, the Second Circuit is allowing the SEC and Citigroup to avoid having to proceed with the trial litigation while appealing Judge Rakoff’s decision. The appeal is scheduled to be heard in September, though the dicta in the March 15 decision appears to support the position that the Second Circuit is prepared to overturn Judge Rakoff’s decision.

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The Second Circuit Casts Doubt on 5% Materiality Guideline

By By Charles Rogerson, J.D. Class of 2013 | Posted on

In Litwin v. Blackstone Group, L.P. (2011) the U.S. Court of Appeals for the Second Circuit concluded that the District Court erred in dismissing Plaintiffs’ complaint because Plaintiffs plausibly alleged that omitted or misstated trends from Defendants’ initial public offering registration statement and prospectus were material under Item 303(a)(3)(ii). In so holding, the Second Circuit stressed the importance of both a quantitative and qualitative analysis of materiality, stating that “[e]ven where a misstatement or omission may be quantitatively small compared to a registrant’s firm-wide financial results, its significance to a particularly important segment of a registrant’s business tends to show its materiality.” The decision casts doubt on the widely held belief amongst practitioners that a misstatement or omission that affects less than 5% of a firm’s assets is immaterial.

The case concerned the 2007 initial public offering of Defendant Blackstone Group, L.P., an alternative asset management and financial services company holding approximately $88.4 billion in assets in 2007. Plaintiff alleged misstatements and omissions with regard to its holdings in FGIC Corp., Freescale Semiconductor, Inc, and general residential real estate holdings.

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Out, Out Brief Candle: European Union Competition Commission Blocks NYSE Euronext-Deutsche Boerse Merger

By By Mike Perez, J.D. Candidate Class of 2012 | Posted on

As reported by the Network last month, the proposed merger between NYSE Euronext and Deutsche Boerse (DB) was in jeopardy as Juan Alumnia, head of the European Union’s Competition Commission, publicly stated that he would recommend prohibiting the deal from going forward. On February 1, the commission officially blocked the proposed merger that would have created the world’s largest exchange operator. As a result of the decision, NYSE Euronext announced that “both companies have agreed to a mutual termination of the business combination agreement originally signed by the companies on February 15, 2011.”

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On the Passing of 14(a)-11 and Shareholder Nominations in BOD Elections

By Peter Benesch, J.D. Class of 2013 | Posted on

On July 22, 2011 the D.C. Circuit struck down an SEC regulation (Rule 14(a)-11) that would have required publicly traded companies to allow qualified shareholders to propose nominations in Board of Directors (BOD) elections. The court held that the SEC failed to perform a required cost/benefit analysis of the new provision, as mandated under Section 3(f) of the Exchange Act and Section 2(c) of the Investment Company Act of 1940. Consequently, Rule 14(a)-11 was declared invalid and unenforceable.

Before the SEC proposed the final version of 14(a)-11, Delaware preemptively proposed and implemented its own law regarding shareholder nominations for BOD elections: DGCL 112. A critical difference between the Delaware law and the SEC proposal is that DGCL 112 does not require that Delaware corporations allow qualified shareholders to nominate candidates in BOD elections, but rather provides that qualified shareholders can be given the authority to nominate candidates if such a provision is adopted in the company’s bylaws. Additionally, Section 112 does not make shareholder nominations of BOD members the default rule, as the procedure must be proactively adopted in the bylaws. Rule 14(a)-11 would have made it mandatory for all publicly traded companies to allow qualified shareholders to nominate candidates in BOD elections (and would have superseded DGCL 112, but for being struck down).

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The Largest Exchange Operator That May Never Be

By By Mike Perez, J.D. Candidate Class of 2012 | Posted on

On January 10th, 2012, it was reported that European Competition commissioner Joaquin Alumnia would recommend blocking the proposed merger between NYSE Euronext and Deutsche Boerse by the European Union’s Competition Commission at its February 1st meeting. For 11 months, NYSE’s Duncan Niederauer and Deutsche Boerse’s Reto Francioni have been trying to quell Mr. Alumnia’s concern that such a merger would give the resulting exchange control over approximately 90% of Europe’s traded derivatives. If allowed to proceed, the merger would create the world’s largest stock exchange operator.

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Volcker Rule Update #2: Comment Period Extended; Analysis of the Hedging Exemption

By Peter Benesch, J.D. Class of 2013 | Posted on

The deadline for submitting comments regarding the proposed regulations implementing the Volcker Rule has been extended from January 13 to February 13. As we noted in our previous update on the Volcker Rule, the timeline was already very tight if regulators intended to meet the implementation deadline of July 2012, and this postponement only makes that timeline even tighter and less feasible.

Putting this logistical problem to a side, one major provision in the proposal we have yet to discuss in-depth is the exemption provided in the Volcker Rule for risk-mitigating hedging transactions. The current proposal would allow banks to maintain, purchase, or sell hedging positions with commercial deposits provided that these positions arise from and are related to specific risks involved in the bank’s other legitimate positions, contracts, or holdings. These other risks include market risk, counterparty/credit risk, currency/foreign exchange risk, and interest rate risk (among others). Additionally, the hedged positions taken by the bank must be “reasonably correlated” (or, to be more precise, reasonably negatively correlated) with the risks purportedly being mitigated.

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Seasoning Requirements: Regulating Chinese Companies And Reverse Mergers

By By Andrew Sioson, J.D. Class of 2013 | Posted on

On October 26th the SEC closed debate on a proposal to adopt “seasoning” requirements for companies listed on public exchanges, such as NASDAQ and NYSE. The proposed seasoning requirements aim to protect investors from a rash of accounting scandals perpetrated by companies that have avoided normal reporting and auditing requirements through the strategic use of reverse mergers. Many of the companies that have been engaging in reverse mergers and perpetrating these accounting scandals have been based in China, which have caused US investors to flee from Chinese equities.

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