Governance and Defence Flashcards
Governance and Failure because of (2)
- insider trading
- corporate fraud
Regulatory responses (2)
- Sarbanes Oxley act
- NYSE review listing requirements
Sarbanes Oxley act includes (6)
- auditor requirement
- accountability
- penalties
- certification
- full disclosure
- Sec power
Corporate governance (2)
- corporate is an agency relationship
- corporate enterprise system that has developed includes limited liability corporation with widely disperse ownership
Corporation includes (4)
- contractual relationship
- separation of ownership and control
- agency cost
- divergent stakeholder interst
Agency cost includes (3)
- auditing system
- bonding assurance
- system change to improve control
Internal control mechanism includes (3)
- BOD
- balances ownership concentration: entrenchment, convergence
- executive compensation: conflict of interest reduces by maximizing activity, conflict of interest increases from overvaluation of dishonesty and fraud
Board of director (1)
- fiduciary duties to stakeholders (responsible, accountable, and legally liable)
BOD job is to monitor management performance (4)
- independence: higher composition of other directors, more effective monitory
- stock ownership: positive link between director stock ownership and corporate performance
- director quality: diverse experience and background as well as firm industry expertise
- board activism: frequent and open communication
BOD legal obligation (7)
- business judgement rule
- liability to failure to take care
- obligation to respond
- obligation to stakeholders
- obligation to use special committee
- obligation to maximize value
- fiduciary out: recommend but not promise
Roles of BOD (5)
- board of chair
- auditor committee
- compensation committee
- negotiation/governance committee
- special committee
External control mechanism(4)
- stock price performance: poor performance have higher management turnover
- institutional investors
- proxy contest
- takeover
Corporation governance in action (2)
- execution by implementing and monitoring
- control, plan, and feedback mechanism utilize to ensure management have best interest of stakeholders
Defense (1)
- structural or legally impediment of another firm to be able to conduct successful takeover
Possible motivation for defense (3)
- target seeks better price
- management believes target performance is better as independent firm
- mangement seeks to entrench itself
Impact of defense (2)
- reduction or removal of premium takeover
- board conflict of interest with fiduciary duties
Financial defensive measures (1)
- one view: effective firms have favourable market conditions of natural defense from high valuation
Financial conditions that make firms vulnerable (5)
- low q ratio
- liquid balance sheet
- low P/CF
- subsidiaries can be sold without having significant impairing cash flow
- small percentage owned by incumbent management
Tobin Q ratio (2)
- stock are undervalued
- market value of firms securities to replacement of cost of physical assets
Possible financial defense (9)
- increase debt
- increase dividends
- value increase by restructuring
- reduce excess cash
- use excess liquidity to acquire another firm
- liquidate securities performance
- loan covenant force acceleration of repayment
- divest or spin off of non essential subsidiaries
- undervalue of assets should be sold
Method of resistance (6)
- poison pill
- Pacman defense
- legal and litigation
- greenmail
- white knight
- white squire
Greenmail (1)
- target repurchases large block of stocks from specified SH at premium to end hostile takeover
Two divergence views of greenmail (2)
- improvement by forcing improvement on firms operation
- damage SH by raiding firms assets
Problem with greenmail (1)
- cannot buyout 20% of corporate stocks at a preferential price without making offer to all SH or pro rating offer
Pac man defense (5)
- target firm counteroffer of bidder
- effective if target is much larger than bidder
- target finds combination desirable but seeks control of surviving entity
- cannot use antitrust issues as defense
- excessively expensive
White knight (1)
- target chooses another company with which its want to be combined with
White squire (1)
- target sell only a block of its stocks to friendly third party, more difficult to win proxy contest
Poison pill (1)
- creation of securities carrying special rights exercisable by trigger events (bid announcement or large share accumulation)
Types of plan poison pills (2)
- flip out plan: bargain purchases of bidder price at some trigger point
- flip in plan: bargain purchases of target price at some trigger point
Dead had provision (1)
- redeem poison pill only by continuing directors
Golden parachute (2)
- reward failure
- part of employment contract compensate managers for loss of jobs during control change
reorganizing firms claims (3)
- debt to equity exchange
- leverage recaps
- dual class recaps
