“Poison Pills” a Plausible Legal Solution for Dealing with External Activist Investors in Proposed Mergers/Acquisitions

It’s not uncommon for one or a few investors to acquire a large stake in a publicly-traded company in order to either force through or interfere with a proposed merger/acquisition. These investors can, on the one hand, engage in “vote no” campaigns, which can lead to large pay-outs (in the form of better terms for the deal) as well as temporary increases in the stock price of the company, but it can also prevent otherwise beneficial and profitable deals from occurring.Today some companies are requiring potential targets to adopt “poison pills” in order to prevent such hold-ups. Case in point: Dell, which insisted that Compellant Technologies implement a poison pill provision before entering into a merger agreement with the company.

There are limits on the legal efficacy awarded to these provisions.  Latham & Watkins recently issued a client alert  highlighting the generally recognized legal limits of poison pill provisions under Delaware state law by reviewing several recent cases.The limits are centered around the existence of a reasonable threat and whether the challenged provision was a proportional response that did not sacrifice the exercise of the franchise by stockholders.One solution that exists to satisfy the last provision (exercise of the franchise) is to require stockholder approval before a poison pill provision kicks in (known as a “chewable pill”).


Bernanke Testifies on Fed’s Commitment to Implementing Dodd-Frank

In a statement before the Committee on Banking, Housing, and Urban Affairs, Ben Bernanke reaffirmed the Federal Reserve’s commitment to working with financial regulatory agencies to implement Dodd-Frank – more than 50 rulemakings and formal guidelines.  According to Bernanke’s statement, the Fed has more than 300 staff members working on implementation projects, and the transfer of the Federal Reserve’s consumer protection responsibilities to the new Bureau of Consumer Financial Protection is well under way.  After delving into a list of ongoing implementation projects, Bernanke concluded his statement by expressing the Fed’s commitment to its “long-standing practice of ensuring that all of its rulemakings are conducted in a fair, open, and transparent manner.”

Click here to read his entire testimony.

Open Season: Dodd-Frank’s Whistleblower Bounty Provision

In the wake of financial collapse and corporate scandal, Congress acted to create incentives for employees to report securities fraud to the Securities and Exchange Commission. Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act aims to do just that.  This section, also referred to as the “whistleblower bounty” provision, amends the Securities and Exchange Act of 1934 to provide that any whistleblower who voluntarily provides “original information” regarding a violation of securities law to the SEC shall receive between 10% and 30% of any successful enforcement of penalties greater than $1,000,000. On November 3, 2010, the SEC submitted a notice of proposed rulemaking to implement this section of the Act, with a deadline for final rules of April 21, 2011.Since the passage of the bill, debate has swirled about the effect of the provision on employees who may have knowledge regarding securities law violations by their employers. One argument in favor of the new section is that the financial incentives will provide the SEC with reliable information leading to successful enforcement of securities law as well as information that may be used to further investigations into questionable practices by reporting companies. Since the Act’s passage, the SEC has already reported a marked increase in the number of whistleblower complaints filed.


National Mortgage Servicing Standards and Looming Litigation

When the Obama Administration released the Treasury’s white paper to propose reforms to the national housing finance market, it also called for the establishment of national standards for mortgage servicing.  The paper put forth a set of basic proposals to reform mortgage servicing and foreclosure processing practices but stopped short of comprehensive and detailed solutions.  Recently, however, Acting Chairman of the Office of the Comptroller of the Currency, John Walsh, went further and provided the first glimpse in his testimony at the Senate Banking Committee of what could form the backbone of national mortgage servicing standards.

These new standards come on the heels of reports that federal regulators will be taking legal action against the 14 largest U.S. mortgage servicers for failure to comply with foreclosure laws and for the pervasive problems that arose out of processing foreclosures.   Also, a new NERA study looks at the economic implications of foreclosure suspensions and potential litigation related to problems associated mortgage servicing and foreclosure processing.

James Nguyen, National Mortgage Servicing Standards and Looming Litigation, Berkeley Bus. L.J. Network (February 23, 2011), http://thenetwork.berkeleylawblogs.org/2011/02/23/national-mortgage-servicing-standards-and-looming-litigation/.

The $13 Billion Dollar Question: How Will the Proposed Interchange Fee Rules Work?

When the Federal Reserve released its proposed rule (Regulation II) implementing Section 1075 of the Dodd-Frank Act (DFA) on Debit-Card Interchange Fees and Routing, it unleashed a firestorm of comments from the banking industry opposing the rule.  Some have estimated that the new regulations would reduce banks’ income from fees by $13 billion.  Last week, the House Financial Services Committee held a hearing on the issue.

What Regulation II does, broadly speaking, is that it seeks reduce the amount of fees that debit-card bank issuers can charge merchants with the intent that such reductions would result in lower retail prices for consumers.  It does so in two ways: (1) by enacting a prohibition on network exclusivity arrangements and routing restrictions, and (2) establishing an interchange fee standard.

Seen more as a market-based approach, the prohibition on Network Exclusivity Arrangements and Routing Restrictions prohibit issuers and payment card networks from restricting the number of networks on which a debit card transaction may be processed to fewer than two unaffiliated networks. In Federal Reserve Governor Sarah Raskin’s recent testimony on the proposed rule, there are two possible interpretations of the prohibition:  (more…)

Has Sarbanes-Oxley Reduced IPOs?

The Sarbanes-Oxley Act was enacted in 2002, setting higher standards for all U.S. public company board, management and public accounting firms.  The Act mandated reforms to enhance financial disclosures and corporate responsibility.  Since the enactment of Sarbanes-Oxley, a debate has ensued about whether or not overregulation has deterred foreign companies from listing in the United States.  In response, the SEC reduced regulatory requirements on foreign and public companies, making compliance easier.  Public companies now face lighter regulations as a result of Supreme Court decisions and requirements that have been eliminated through the Dodd-Frank Act.  The Supreme Court made it significantly harder to sue public companies for securities fraud in several cases and the Dodd-Frank Act eliminated the requirement that auditors must certify the validity of company’s internal controls for companies with a market value of less than $75 million.

A study by Berkeley Law Professor Robert Bartlett, however, found that a majority of companies bought by private equity firms still voluntarily complied with the requirements of Sarbanes-Oxley.  Professor Bartlett’s study corrects a significant bias in the hypothesis that the compliance costs associated with Sarbanes-Oxley resulted in an increase of firms going private.  His study provides considerable evidence to show that the wave of going-private was not driven by the compliance costs.

SEC Issues Final Say-On-Pay Rules

On January 25, 2011, the Securities and Exchange Commission (SEC) officially adopted final rules implementing Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This so-called “Say-on-Pay” provision establishes three new shareholder-voting requirements for large companies subject to federal proxy rules.  First, such companies must provide shareholders with a non-binding vote on executive compensation at least once every three years. Second, large companies must give shareholders a non-binding vote establishing the frequency with which they engage in the say-on-pay vote at least once every six years. Finally, shareholders must be given a separately held advisory vote on “golden-parachute” arrangements and understandings in connection with mergers and acquisitions and other transactions, including going-private transactions and third-party tender offers.

For large reporting companies, the non-binding vote on executive compensation as well as the non-binding vote on frequency must be had at the first shareholder meeting after January 21, 2011.  However, smaller reporting companies are not required to hold a say-on-pay or frequency vote until the first shareholder meeting to occur after January 21, 2013.  New regulations regarding golden-parachute votes and disclosures will become effective after April 25, 2011.


Dodd-Frank Requires Removal of References to Credit Rating Agencies from Federal Regulations

Section 939A of the Dodd-Frank Act requires federal agencies to remove references to credit rating agencies (such as Moody’s Standard and Poor’s) from existing regulations and replace them with other appropriate standards for the calculation/measurement of risk. The rule stems from one of the perceived problems that led to the financial crisis: over-reliance on credit-rating agencies. In essence, numerous government regulations have delegated the authority of determining the risk of investments to the major credit-rating agencies and some believe it was the severe underestimation the risks of sub-prime mortgages (combined with both the private and public sector’s reliance on these ratings) that led to financial collapse in 2007/2008.

Some have also questioned the perceived conflict of interest the credit rating agencies have due to the fact that the agencies are paid by the entities/institutions which require assessment.The big three credit rating agencies have not put up much public resistance to these measures, making statements such as that by Standard and Poor’s: “the market – not government mandates – should decide the value of our work”. The rating agencies are also coming under fire in Europe, where EU officials have called for the establishment of new European credit rating agencies to challenge the alleged oligopoly that the U.S.-based agencies have. While these measures do represent justified responses to the clear deficiencies in our financial system’s ability to evaluate and account for risk in investments, establishing a new (more accurate) measure is much easier said than done, particularly given the fact that Moody’s and Standard and Poor’s have spent more than a century building up their reputation amongst market participants.

Bigger than Fannie and Freddie: Defining Qualifying Residential Mortgages

A prominent feature of the Dodd-Frank Act is the risk-retention provision in Title IX (Subtitle D, § 941).  It requires banks that originate mortgages to retain 5 percent of the credit risk in their portfolios.  The risk-retention requirement was created in direct response to the oft-cited lending practice that contributed to the housing bubble where mortgage originators would sell off the securitized loans without retaining any of the credit risk.  A key exception to the provision concern “qualified residential mortgages” (QRM) and loans designated as QRMs are exempt from the risk-retention requirement.