In recent years, there has been an increase in the number of firms opting to either forgo the public equity market or exit the market in favor of private financing. Increasingly, financing for private firms comes from private funds, such as private equity, venture capital, and hedge funds. In 2015, private funds owned stakes in over 7,500 firms and had over $4 trillion in capital under management. This amounts to a significant portion of the overall economy relative to the total U.S. market capitalization of $25 trillion.
As the privately-held sector of the economy grows, the financial … Read more
The credit bull market charged through 2017, with many terrific outcomes for opportunistic borrowers. But even in the best of times, borrowers and their advisors should remain nimble and thoughtful, and 2018 brings much to consider, including the impact on the acquisition financing markets of the most significant business tax reform in a generation, and the continued rise of the net-short debt investor.
2017: A Good Year to Be a Borrower
2017 was another banner year for borrowers. Corporate debt yields were low, gross issuance of syndicated loans and investment grade bonds each hit new records, and high-yield bond issuance, … Read more
Press reports indicate that Spotify, the music streaming company, is planning an initial public offering in March or April of this year, and that it plans to use a novel “direct listing” approach that has not previously been used at the New York Stock Exchange. Already, it has made a confidential filing of its registration statement with the SEC. Eager to accommodate Spotify, the NYSE has filed amendments to its listing rules with the SEC (and twice amended this filing, most recently in December). If the news stories are accurate, the SEC has signaled its willingness to approve … Read more
Since the adoption of the General Data Protection Regulation (GDPR) in 2016, considerable attention has focused on the vastly increased scope of potential administrative fines, and even more attention is being paid to the issue with the GDPR becoming effective on May 25, 2018. In this post, we summarize the key fining provisions, and analyze the recent relevant guidance on this issue from the Article 29 Working Party (an advisory group consisting of representatives from national data protection authorities together with the European Commission).
To summarize, the GDPR provides for potentially massive new fines for violations of its provisions, which … Read more
The annual scrum between companies and shareholders seeking to have their proposals included in the company’s annual proxy statement is well underway. One of the bases upon which a company may exclude a shareholder proposal from its proxy statement is if it “directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting.” After some controversy in 2015 over the scope of what it means to “directly conflict,” the SEC staff issued Staff Legal Bulletin (SLB) 14H, which said that proposals conflict only “if a reasonable shareholder could not logically vote in favor … Read more
In 2018, corporate boards will increasingly be called upon to respond to how innovative competitors disrupt their companies’ business models. These competitors use technology, scale, and sharp insights into consumers to lower prices, improve products and services, and draw customers away from traditional companies, forcing those companies to cut costs and lose relevance. Blockbuster, Borders, and ESPN are prime examples of victims of nimble disruptors.
Victims typically overlook the trajectory of disruptors, which focus initially on perfecting their business models rather than their products or services. Flawed governance can lead to such oversight by making it hard for … Read more
In response to greater financial constraints and more costly external financing, firms may avoid corporate taxes to generate funds for investment. In that sense, outside investors may recognize tax management as a value-increasing activity, especially for a financially constrained firm. However, more aggressive tax avoidance may also be associated with increased opportunities for rent diversion by firm managers. Therefore, the impact of corporate tax avoidance on financial constraints is likely to depend on the strength of a firm’s corporate governance. In an article forthcoming in Financial Management , we examine how corporate governance affects the relationship between a firm’s tax … Read more
The process of determining whether big mergers comply with antitrust laws is careful and intensive. The Federal Trade Commission and the Department of Justice reported that in 2011 they examined in detail 40 percent, and initiated second request investigations in 15 percent, of all deals over $1 billion. For example, after an extensive investigation that year, the Department of Justice blocked AT&T’s $39 billion acquisition of T-Mobile USA. AT&T had to pay a $4 billion reverse break fee, and its stock price dropped significantly.
The case shows how costly the antitrust review process can be for merging ﬁrms. Some … Read more
Global M&A accelerated in the fourth quarter of 2017, driven in part by tech expansion and strong economies in several key markets, and there are many signals pointing to a continued strong pace of transactions, including in the U.S. Overall M&A volume in 2017 continued to be robust, reaching $3.6 trillion, approximately 35% of which involved cross-border deals. Four of the ten largest non-hostile deals announced in 2017 were cross-border transactions.
U.S. targets accounted for approximately $1.4 trillion (approximately 40%) of last year’s deal volume, with approximately 18% of U.S. deals involving non-U.S. acquirors. German, French, Canadian, Japanese and U.K. … Read more
Disclosure and reporting regulation is a central and recurring policy issue that has received significant attention in academic research on accounting, finance, and economics. Further fueling demand for this research are increasingly frequent requests that policy makers and regulators conduct cost-benefit or economic analyses of both existing and planned regulations and standards.
In a recent paper, we review the empirical literature on the economic consequences of disclosure and financial reporting regulation, drawing on U.S. and international evidence. We also extensively review the literature on mandatory International Financial Reporting Standards (IFRS). Our efforts are timely, because three developments have spurred disclosure … Read more
In NRG Yield v. Crane (Dec. 12, 2017), the Court of Chancery dismissed fiduciary duty claims against directors who approved a corporate recapitalization that was proposed by a controller and would perpetuate its control. The reclassification provided for the issuance of non-voting equity that could be used by the corporation as currency to make future acquisitions without diluting the controller’s voting control.
Chancellor Bouchard concluded that the recapitalization was a “conflicted controller transaction” to which “entire fairness” presumptively applied because the controller obtained a “unique benefit” from the transaction not shared with the other stockholders—namely, the ability to maintain its … Read more
The Second Circuit’s en banc decision in SEC v. Texas Gulf Sulphur Corp. (“TGS”) is approaching its 50th anniversary, and it’s still well-known for several important holdings. Perhaps the most celebrated (or condemned) accepted the SEC’s argument that corporate insiders have a duty to “abstain or disclose” from trading while in possession of material nonpublic information. The opinion makes a bold claim that the law in play (Rule 10b-5’s antifraud prohibition) “is based in policy on the justifiable expectation of the securities marketplace that all investors trading on impersonal exchanges have relatively equal access to material information.”… Read more
On December 22, 2017, the Securities and Exchange Commission’s Office of the Chief Accountant and Division of Corporation Finance (“Staff”) issued important guidance that provides significant relief and helpful answers on some of the accounting and disclosure issues raised by the comprehensive tax act, commonly called the Tax Cut and Jobs Act, that was signed into law on that same date (the “Tax Act”). The Staff’s guidance is contained in two pronouncements: (1) Staff Accounting Bulletin No. 118 (“SAB 118”), which essentially allows companies to take a reasonable period of time to assess, measure and record the effects of … Read more
A number of companies have recently gone public with dual-class share structures, allowing founders to retain control. Most of these companies’ articles of incorporation contain a provision that requires any merger consideration to be distributed pro rata among all shareholders. These equal treatment clauses, in effect, give away founders’ control premium to minority shareholders. On first glance, these clauses seem to provide some protection to minority shareholders, who know that, in the event of a change-of-control, they will be compensated at the same rate as founders. But, as my recent paper explores, there are agency costs lurking beneath the surface … Read more
On December 27, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) released its biennial report on the consumer credit card market (“2017 Report” or “Report”), which summarizes its views on the state of the consumer credit card market over the past two years. The Report is particularly noteworthy because it provides the first insight into the post-Cordray CFPB’s views on the state of the consumer credit card market.
The Report was issued pursuant to Section 502(a) of the CARD Act (“CARD Act”), which directs the CFPB to review and report on the consumer credit card market. The CARD Act … Read more
The blockchain revolution is upon us. In a seemingly endless wave of coverage focusing on everything from financial services to healthcare to supply chain management, commenters are predicting fundamental changes to technology and business models.
Smart contracts – electronic contracts executed on a blockchain – are an important part of this story. Though electronic contracts have been common for some time, smart contracts are radically different.
A smart contract contains the terms and the enforcement mechanism for a transaction. Parties to a smart contract translate the terms of their agreement into a series of if-then rules built into computer … Read more
On December 14, ISS released its Frequently Asked Questions (FAQ) documents on U.S. Compensation Policies and U.S. Equity Compensation Plans as well as a whitepaper on Pay-for-Performance Mechanics designed to help stakeholders understand upcoming changes to its compensation-related methodologies. These documents are ISS’s final, and more fulsome, description of the methodological changes previewed in its preliminary FAQs document which was released in November. All changes will be effective for annual meetings on or after February 1, 2018.
ISS announced two key changes to its methodology for 2018. First, ISS modified its quantitative pay-for-performance screen, most notably by adding a new … Read more
In July 2017, the Securities and Exchange Commission (SEC) issued a ruling on The DAO, a decentralized smart-contract based investment fund, determining that the tokens it sold were unregistered securities and warning that other initial coin offerings (ICO) may need to comply with securities laws. The DAO operated a decentralized venture capital firm on top of the Ethereum protocol. Investors contributed ether (a crypto-currency) to The DAO and received DAO tokens in exchange. The DAO held the ether in smart contracts, while the DAO tokens entitled investors to: (1) vote on which investment proposals to fund, and (2) a … Read more
On December 13, the Delaware Supreme Court reversed the Court of Chancery’s decision in In re Investors Bancorp, Inc. Stockholder Litigation, and held that entire fairness will apply to any board’s decision to award director compensation unless the award is either (1) specifically approved after the fact “by fully informed, uncoerced, and disinterested stockholders,” or (2) effectively pre-approved, in the form of a “self-executing” plan that leaves no room for discretion with respect to specific awards. This marks a change in Delaware law, and eliminates the discretion that boards previously could exercise safely under stockholder-approved compensation plans … Read more
In a new paper, “Worthless Companies,” I explain how companies with worthless assets can have substantial equity value on efficient markets and debt that trades near par, so long as an irrational bidder may acquire the company.
Consider a firm with a market value of more than $1 billion. The firm has sales under $1 billion and has never been profitable. The firm describes its mission as, “to make incredible home cooking accessible to everyone,” and its business is to sell ready-to-prepare meals. Or consider a firm with a market value of more than $8 billion with revenues of just … Read more
Amid the uncertainty Brexit has created, foreign investors are assessing their existing and prospective investments in the UK, with particular focus on Brexit’s potential impact on EU-UK trade and labor mobility. No one has a crystal ball but our MoFo attorneys around the world have, through conversations with our clients and contacts, gained a picture of the views of smart and successful businesses and professionals about what they expect from Brexit. We have spoken to companies, from the very largest to startups, around the globe. This article sets out this crowd-sourced thinking from a wide variety of thoughtful contacts, and … Read more
The Blue Sky Blog will be quiet for the next week but back, better than ever and with new features, for the New Year. Happy Holidays.… Read more
The Securities and Exchange Commission (SEC) Division of Corporate Finance (DCF) reviews and regulates information in public filings to “deter fraud and facilitate investor access to information necessary to make informed investment decisions.”
Commentators criticize the SEC for being an ineffective regulator, with specific concerns about its ability to identify financial reporting errors or fraud in companies such as Enron. These concerns led to a General Accountability Office (GAO) review, new regulations codified in the Sarbanes-Oxley Act, calls for increased funding, and a renewed focus on detecting accounting errors. Despite ample anecdotal evidence of … Read more
In my article Chapter 11, Corporate Governance and the Role of Examiners, I propose a possible solution to corporate governance problems caused by the debtor-in-possession model of Chapter 11 bankruptcy proceedings.
Agency and Law Enforcement Problems in Chapter 11
Corporate governance does not have many advocates in bankruptcy proceedings. In a Chapter 11 action, managers run the company and have to take many heterogeneous interests into account. However, they do not always have incentives to do so. Depending on the circumstances, management relies either on the shareholders or on the influential creditors. The latter – hedge funds, private equity … Read more
“Seniors [are] particularly vulnerable to investment scams” read one headline. “We are taking further steps to find and eliminate from our system pump-and-dump scammers, those who prey on retirees,” noted Jay Clayton, chairman of the Securities and Exchange Commission. The news media, movies like “The Wolf of Wall Street,” and even regulators have long portrayed the elderly and other vulnerable people as the most frequent victims of these fraudulent schemes. Yet, do we actually know who invests in pump-and-dump scams? It is a critical question, because designing effective investor protection requires understanding who invests and why.… Read more
Does the quality of legal and other institutions make a difference to economic development and growth? In their very well-known studies of the relation between law and finance, Andrei Shleifer and his collaborators (in particular Rafael La Porta and Simeon Djankov) found evidence to support this claim. Their econometric analysis showed that higher levels of shareholder and creditor protection were correlated with increased financial development. This work became highly influential among researchers and policy-makers. Since the mid-1990s, the widespread belief has been that strengthening shareholder and creditor rights will lead to improved financial outcomes. This view became a mainstay of … Read more
On November 16, 2017, Institutional Shareholder Services (“ISS”) issued its updated proxy voting guidelines for the upcoming 2018 proxy season. Notable updates applicable to U.S. companies include new or revised policies:
- to respond to recurring patterns of excessive non-employee director compensation;
- relating to director elections at companies with poison pills; and
- to address shareholder proposals on gender pay gaps.
ISS also clarified its policies on a number of other topics. The full text of the 2018 proxy voting guidelines published by ISS may be accessed here.
Non-Employee Director Compensation
Under the new guidelines, ISS will recommend voting against board … Read more
On December 14, the Delaware Supreme Court issued its much-anticipated opinion in the appraisal proceeding from the 2013 acquisition of Dell Inc. Along with August’s DFC Global opinion, the court’s pronouncements in Dell will have lasting effects on the way that appraisal valuations play out for years to come. In particular, the case(s) will have a durable impact on (a) how courts weigh competing financial methodologies for assessing fair value, (b) how to scrutinize the bidding process and procedures, and (c) whether courts should distinguish among strategic bidders, financial bidders, and management bidders in making fair-value assessments.
The … Read more
In U.S. and global M&A activity for November 2017, total deal volume by dollar value increased to a 12-month high, while the total number of deals decreased to a 12-month low. In the U.S., deal volume increased by 179.0% to $236.40 billion while the number of deals decreased by 15.6% to 712. Globally, deal volume increased by 43.7% to $390.00 billion while the number of deals decreased by 12.9% to 2,839. These large increases in deal volume were, however, driven by one transaction in particular, Broadcom Ltd.’s $130 billion (including assumed debt) unsolicited offer for Qualcomm, Inc. If we excluded … Read more
Insider trading and market manipulation — two of the most high-profile categories of financial misconduct — have resulted in several major cases, and significant sanctions in recent years. Our recent article examines the type, frequency, and severity of sanctions imposed for insider trading and trade-based financial market manipulation (“market manipulation”) over seven years from 2009 to 2015 in Australia, Ontario (Canada), Hong Kong, Singapore, and the United Kingdom (UK).
Regulatory Enforcement Approaches – Market Manipulation
What we found from our empirical research was that even in jurisdictions with similar insider trading and market manipulation laws, enforcement approaches differed significantly. A … Read more
Over the past two years, the deal litigation landscape has changed dramatically. In early 2016, the Delaware Court of Chancery announced a new rule for evaluating disclosure-based settlements in deal litigation — the “plainly material” standard — and expressed a preference for disclosure claims either to be litigated or mooted, rather than settled. In re Trulia, Inc. Stockholder Litigation, C.A. No. 10020-CB (Del. Ch. Jan. 22, 2016). Trulia created a ripple effect across deal litigation in Delaware and beyond, with some interesting, and perhaps unforeseen, results.1
Disclosure-based settlements before the Court of Chancery are all but extinct. Litigation … Read more
The past two decades have witnessed a dramatic increase in firms’ engagement with Corporate Social Responsibility (CSR) in response to the needs and expectations of a wide range of stakeholders. CSR practices can be understood as voluntary steps to improve social or environmental conditions. Examples of CSR practices include offering employees child day care or paid parental leave, reducing the carbon footprint or donating to charity. Together with the increasing attention, an important debate about CSR has emerged between two opposing sides. Proponents of CSR argue that socially responsible practices can have a positive impact by enabling firms to secure … Read more
Post-merger appraisal rights have attracted more than their fair share of controversy in recent years. When activated, appraisal rights give the shareholders of a Delaware target corporation the option to eschew the consideration of the proposed deal, pursuing instead a judicial determination of the “fair value” of their shares. By statutory requirement, this judicially-crafted valuation imposes no explicit burden of proof on the parties, and it must be based on all relevant factors (excluding buyer side synergies).
Although historically a sleepy corner of mergers and acquisitions litigation, appraisal proceedings have awoken dramatically in the last decade. An important … Read more
One of the most eye-catching items in the recently released 2017 Annual Report of the Enforcement Division of the Securities and Exchange Commission (SEC or the Commission) is the significant decline in enforcement activity from 2017. The report, issued on November 15th and summarizing the agency’s activity from October 1, 2016 to September 30, 2017, has drawn scrutiny from numerous commentators, who view the decline as the result of an ideological shift from the aggressive, prosecutorial style of enforcement of ex-Chairwoman Mary Jo White to a more restrained approach under new Chairman Jay Clayton. However, the SEC insists that despite … Read more
In recent years, there has been considerable criticism of the amount of money that CEOs earn to run the largest U.S. companies. Governance researchers have expended considerable resources examining executive compensation in an effort to determine whether pay levels are set fairly. The results of these studies are generally mixed.
An important and related question, however, is rarely asked: Just how scarce is CEO talent? How many people are very well qualified to run a large, publicly traded company? These questions have important implications for CEO pay levels, performance measurement, succession planning, and internal talent development.
CEO Talent Pool
Recently, … Read more
The two most influential proxy advisory firms—Institutional Shareholder Services (“ISS”) and Glass, Lewis & Co. (“Glass Lewis”)—recently released their updated proxy voting guidelines for 2018. The key changes to the ISS and Glass Lewis policies are described below along with some suggestions for actions public companies should take now in light of these policy changes and other proxy advisory firm developments. An executive summary of the ISS 2018 policy updates is available here and a more detailed chart showing additional updates to its voting policies and providing explanations for the updates is available here. The 2018 Glass Lewis Guidelines … Read more
Start a conversation with a skeptic about the utility of corporate criminal law, and you soon come to an impasse: What could it possibly mean to punish a collective, fictional person? Good responses to this question have been hard to come by. People who believe in retribution, for example, would say that punishing criminals is a matter of giving them their just deserts. Common though retributive perspectives may be in the popular press and politics, it is far from clear what a corporation’s just deserts could be. Such justice frequently involves suffering of some kind, but suffering is … Read more
The world’s social media platforms and financial markets are abuzz about cryptocurrencies and “initial coin offerings” (ICOs). There are tales of fortunes made and dreamed to be made. We are hearing the familiar refrain, “this time is different.”
The cryptocurrency and ICO markets have grown rapidly. These markets are local, national and international and include an ever-broadening range of products and participants. They also present investors and other market participants with many questions, some new and some old (but in a new form), including, to list just a few:
- Is the product legal? Is it subject to regulation,
… Read more
Corporate inversions have captured the imagination of the public and the popular press as well as that of the academic community. The idea is that a little paperwork can convert a U.S. corporation (which pays tax on its worldwide income) into a foreign corporation (which pays tax only on its U.S. source income), and the consensus is that the exploitation of this loophole by multinational corporations is abusive and unfair. Responding to these concerns, Congress and the Treasury Department have attempted to make it more difficult for U.S. multinationals to obtain tax advantages by inverting.
Numerous commentators have argued that … Read more
On November 29, 2017, the Solicitor General filed a brief in the Supreme Court on behalf of the Securities and Exchange Commission (“SEC”) reversing the agency’s position and arguing that SEC administrative law judges (“ALJs”) have been unconstitutionally appointed to their posts. The Solicitor General’s brief was filed in response to Raymond Lucia’s petition for a writ of certiorari after the D.C. Circuit Court of Appeals rejected a challenge to the constitutionality of the appointment of SEC ALJs (detailed here). The Solicitor General also raised questions regarding the validity of statutory restrictions that protect SEC ALJs from removal. The … Read more
An often-over-looked aspect of regulation is how agencies are organized. Regulatory agencies for many industries, including banking, pharmaceuticals, mining, and agriculture, rely on a mix of centralized decision-making and delegated monitoring. For instance, in the case of banking, federal agencies design regulations in Washington, D.C. but monitor banks at the local level by utilizing semi-autonomous field offices.
A major advantage of this dispersed presence is that it allows local examiners and supervisors to interact with regulated firms more frequently and to collect “soft information” about firms’ performance that is often imperfectly captured through accounting-based reporting measures. The approach may, however, … Read more
On November 28, 2017, the Supreme Court of the United States held oral argument in the highly anticipated case of Cyan, Inc. v. Beaver County Employees Retirement Fund, No. 15-1439, to decide whether the Securities Litigation Uniform Standards Act of 1998 (SLUSA) divested state courts of subject matter jurisdiction in lawsuits solely alleging claims under the Securities Act of 1933 (the Securities Act). Because of the procedural roadblocks to challenging remand motions in federal court, the Supreme Court took review from an appeal from the California Supreme Court. Defendants/Petitioners argued that state courts did not have jurisdiction over “covered … Read more
For more than a century, the United States has had a worldwide tax system whereby U.S. taxpayers were subject to federal taxation on all of their income “from whatever source derived.” In what would be a sharp break from longstanding practice, The Tax Cuts and Jobs Act, H.R. 1, would shift the United States from a worldwide to a largely territorial tax system by exempting the foreign source income of U.S. corporations from federal taxation. That change, which has been estimated to reduce U.S. tax revenues by more than $200 billion over 10 years, would more closely align the … Read more
It is a pleasure for me to be here with so many compliance officers, lawyers, auditors, and corporate executives for ACI’s 34th annual conference on the Foreign Corrupt Practices Act.
I must admit that I was amused by a marketing blurb for this event. It promised that the audience would hear from “anti-corruption” leaders and other “highly respected” experts. Then, it noted that you also would hear from government officials. I hope those categories are not mutually exclusive!
As a matter of fact, the experts you will hear from include some of the federal government’s leading fraud prosecutors and investigators. … Read more