Second Circuit Holds that Calculations of Goodwill and Loan Loss Reserves Constitute Opinions; FASB Goes a Step Further to Insulate Yearly Declarations Regarding Goodwill Impairment

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

On August 23rd the Second Circuit affirmed a lower court’s dismissal of a suit alleging securities fraud in Fait v. Regions Financial. The plaintiffs, securities holders of Regions, asserted that Regions violated Section 11 and 12 of the Securities Act of 1933 by making material misstatements with regard to goodwill and loan loss reserves in its 2007 10k and 2008 10Q. However the Second Circuit held that the plaintiffs failed to plead a claim under Sections 11 and 12 because calculations of goodwill and loan loss reserves were issues of opinion, not fact, and the plaintiffs did not plead any facts that demonstrated that the officers of Regions knew, at the time the filings were made, that the calculations were incorrect.

In the years prior to 2008, Regions had acquired several businesses that derived a substantial portion of their profits from mortgage-backed securities. In February 2006, Regions reported goodwill (calculated as the difference between the purchase price and the net fair value of a target’s assets) as $11.5 billion and declared its loan loss reserves were $555 million. These amounts remained relatively constant through the first three quarters of 2008. In January 2009, when the company released its fourth quarter 10Q, goodwill decreased by roughly 50% to $5.5 billion and its loan loss reserves doubled to $1.15 billion. For perspective, Lehman Brothers, Bear Sterns, and Washington Mutual had all gone under, and Congress had initiated the Toxic Asset Relief Program (“TARP”) more than three months before Regions recognized any impairment to its goodwill or declared any increase in loan loss reserves.

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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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Reactions Against Currency Manipulation: More Than A Chinese Whisper?

By By Vibhooti Malhotra, L.L.M Class of 2012 | Posted on

The trade balance between United States and China has been heavily in favor of the People’s Republic for a long time. An often-cited reason for this phenomenon is the de facto pegging of the Renminbi (‘RMB’) to the US Dollar. It is believed that the Chinese Government actively purchases American dollars with the aim of artificially undervaluing its own currency. The result of this exercise is that even cheaper Chinese goods reach the American markets.

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Delaware Chancery Court Suggests That Reverse Triangular Mergers May Trigger Anti-Assignment Provisions

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

In April the Delaware Chancery Court refused to grant plaintiff’s motion to dismiss in Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, C.A. No. 5589-VCP (Del. Ch. Apr. 8, 2011), finding that, as a matter of law, a reverse triangular merger may trigger anti-assignment provisions. The decision casts doubt on the widely held belief amongst practitioners that a reverse triangular merger is not a form of assignment, and thus does not trigger anti-assignment provisions in contracts. The decision is likely to add uncertainty as to the implications of a reverse triangular mergers.

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Flexible Purpose Corporation: California’s New Corporate Form

By Angelica Salceda, J.D. Class of 2013 | Posted on

Beginning January 1, 2012, California will be the first state in the country to authorize Flexible Purpose Corporations (FPC)— a new corporate form that will allow a corporation to integrate the for-profit philosophy of the traditional corporation with a special purpose mission that is similar to a charitable purpose.  As authorized through the Corporate Flexibility Act of 2011 (SB 201), California companies will have greater flexibility to combine profitability with a broader social or environmental purpose.  Entrepreneurs and investors will have the opportunity to organize a company to pursue both economic and social objectives, allowing investors to have multiple or blended objectives. (more…)

Three Is The Magic Number: District Court Preserves Tax-Prep Triumvirate, Permanently Enjoins H&R Block Merger

By By Michael Young, J.D. Class of 2012 | Posted on

The Justice Department’s antitrust division has prevailed in its first trial opposing a merger since its defeat by Bay Area giant Oracle in 2004.  In an order issued on October 31, D.C. District Court Judge Beryl Howell granted the government’s motion to enjoin H&R Block’s $287.5 million acquisition of 2SS Holdings Inc., the maker of TaxAct, a popular do-it-yourself (“DIY”) software program.

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Op-Ed: Why Corporations Should Think Twice About Plans To Lower Taxes

By By Evan Roberts, J.D. Class of 2012 | Posted on

At first blush, advocating for lower corporate taxes like Republican candidates Herman Cain and Rick Perry looks like the kind of policy that corporations would salivate over. As conservative pundits like to point out, the United States already has the second-highest statutory corporate tax rate of all developed countries and that it stands alone in its attempt to impose taxes on the global income of its own corporations. The complexities of our tax code also encourage American multinational companies to shift more of their business abroad. And as businesses move away, American jobs move with them. Lowering corporate taxes would keep those jobs here at home and invigorate our economy. Everyone would win, right?

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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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