Archive for July 12th, 2011

How the SEC Should Consider Possible Changes in Section 13(d) Rules

by Lucian Bebchuk and Robert J. Jackson for The Harvard Law School Forum, July 12th, 2011.

In a letter submitted yesterday to the Securities and Exchange Commission, we provide a detailed analysis of the policy issues relevant for the Commission’s ongoing examination of changes to its rules under Section 13(d) of the Securities Exchange Act of 1934. These rules, which govern share accumulation and disclosure by blockholders, are the subject of a recent rulemaking petition submitted by Wachtell, Lipton, Rosen and Katz, which proposes that the rules be tightened.

We argue that the Commission should not view the proposed tightening as merely “technical” changes needed to modernize its Section 13(d) rules. In our view, the proposed changes should be examined in the larger context of the beneficial role that outside blockholders play in American corporate governance and the broad set of rules that apply to such blockholders.

Our analysis proceeds in five steps. First, we describe the significant empirical evidence indicating that the accumulation and holding of outside blocks in public companies benefits shareholders by making incumbent directors and managers more accountable and thereby reducing agency costs and managerial slack.

Second, we explain that tightening the rules applicable to outside blockholders can be expected to reduce the returns to blockholders and thereby reduce the incidence and size of outside blocks—and, thus, blockholders’ investments in monitoring and engagement, which in turn may result in increased agency costs and managerial slack.

Third, we explain that there is currently no empirical evidence to support the Petition’s assertion that changes in trading technologies and practices have recently led to a significant increase in pre-disclosure accumulations of ownership stakes by outside blockholders.

Fourth, we explain that, since the passage of Section 13, changes in state law—including the introduction of poison pills with low-ownership triggers that impede outside blockholders that are not seeking control—have tilted the playing field against such blockholders.

Finally, we explain that a tightening of the rules cannot be justified on the grounds that such tightening is needed to protect investors from the possibility that outside blockholders will capture a control premium at other shareholders’ expense. (continue reading… )


Internal Control Frameworks: COSO, CoCo, and the UK Corporate Governance Code

published by QFinance, Juy, 2011.


In auditing and accounting, internal control is defined as a process that is designed to help an organization to accomplish specific goals or objectives.

Organizations can choose from a number of internal control frameworks. The “Internal control—Integrated framework” published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) is a widely used framework in the United States and around the world. It was initially published in 1992 “to address key challenges presented by an increasingly complex business environment and help organizations worldwide better assess, design, and manage internal control.” The COSO framework defines internal control as a process, effected by an entity’s board of directors, management, and other personnel, that is designed to provide “reasonable assurance” regarding the achievement of objectives in the following categories:

  • effectiveness and efficiency of operations;
  • reliability of financial reporting;
  • compliance with applicable laws and regulations.

COSO describes internal control as consisting of five essential components. These components, which are subdivided into 17 factors, include:

The CoCo (criteria of control) framework was first published by the Canadian Institute of Chartered Accountants in 1995. This model builds on COSO and is thought by some to be more concrete and user-friendly. CoCo describes internal control as actions that foster the best result for an organization. These actions, which contribute to the achievement of the organization’s objectives, focus on:

  • effectiveness and efficiency of operations;
  • reliability of internal and external reporting;
  • compliance with applicable laws and regulations and internal policies.

CoCo indicates that control comprises: “Those elements of an organization (including its resources, systems, processes, culture, structure, and tasks) that, taken together, support people in the achievement of the organization’s objectives.”

The UK Corporate Governance Code (formerly the Combined Code) was developed by the UK authorities in the early 1990s and last updated in 2010. The Code is principles-based and includes guidelines for best practice. All companies with a Premium Listing on the London Stock Exchange are required to report on how they have complied with the Code and to provide an explanation where they have not. (continue reading… )

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