Reuven S. Avi-Yonah

Too Big to Tax? Vanguard and the Arm’s Length Standard

Vanguard is the world’s largest complex of mutual funds, with over $3 trillion in assets under management, including $215 billion added in 2014. Vanguard’s main attraction to investors is its low costs. Profs. Freeman and Brown (2000) report that the advisory fees charged by the Vanguard Group “tend to present lower expense ratios than the rest of the mutual fund industry” because “Vanguard funds are run on the same basis as most companies in the economy: boards are unswervingly devoted to making as much money as possible … for shareholders [of the funds]. Stated differently, Vanguard funds are uncontaminated by … Read more

WilmerHale reports ALJ Dismisses FTC’s LabMD Complaint for Lack of Actual or Probable Consumer Harm from Cybersecurity Incidents

On Friday, November 13, Federal Trade Commission (“FTC” or the “Commission”) Chief Administrative Law Judge (“ALJ”) D. Michael Chappell issued an Initial Decision in In the Matter of LabMD, Inc. (FTC Docket No. 9357), dismissing the Commission’s Complaint against LabMD, Inc. (“LabMD”), upon a finding that the FTC had failed to “demonstrate a likelihood that [LabMD’s] computer network will be breached in the future and cause substantial computer injury.”1 The ALJ held that showing consumer harm is merely possible is insufficient to prove unfairness under Section 5(n) of the FTC Act.


The FTC’s Administrative Complaint against LabMD alleged … Read more

Bradley, Pantzalis and Yuan

The Influence of Political Bias in State Pension Funds

The propensity to favor local investments is not restricted to individual investors alone but is also common among institutional investors. It also exists in common equity and private equity portfolios of state public pension funds. This phenomenon, known as local bias, has been often attributed to both familiarity and informational advantages associated with geographic proximity to local firms. Recently, state pension funds have come under scrutiny for ‘pay-to-play’ practices. These scandals first appeared in the media and subsequently drew regulators’ attention. On June 30, 2010, the Securities and Exchange Commission issued Rule 206(4)-5 under the Investment Advisers Act of 1940 … Read more

Jones Day explains The Future of Mandatory Consumer Arbitration Clauses

Arbitration as a means of dispute resolution is intended to help consumers and businesses save time and money and achieve fair results when compared to traditional litigation. Millions of contracts for consumer financial products and services have a pre-dispute arbitration clause (“arbitration clause”) that requires consumers and financial institutions to resolve their disputes through arbitration, rather than through the court system.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) required the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) to study arbitration agreements and submit its findings in a report to Congress (“CFPB Study”).[i] In sharp contrast … Read more

John Coffee, Headshot

On Thin Ice: Climate Change, Exxon, the NYAG and the Martin Act

The New York Attorney General, Eric T. Schneiderman, created a stir this month by opening an investigation of Exxon Mobil Corp. pursuant to the Martin Act (New York’s “Blue Sky” Statute).[1] Various Congressmen, Senators and environmental groups also asked SEC Chairman Mary Jo White and Attorney General Loretta Lynch to start similar investigations, but to this point only the NYAG has responded. The exact scope of this investigation is unclear (which is entirely understandable at this stage), but it appears to relate to charges, widely announced in the press in recent weeks, that Exxon “lied” about climate change, allegedly … Read more

Gibson Dunn discusses Depomed Decision Highlighting Importance of Careful Monitoring of M&A Non-Disclosure & Use Obligations

On November 19, 2015, in Depomed, Inc. v. Horizon Pharma plc, the Superior Court of California, County of Santa Clara granted Depomed’s request for a preliminary injunction to enjoin Horizon’s hostile exchange offer to acquire Depomed. The injunction was issued based on Horizon’s misuse of Depomed’s confidential information under a pre-existing confidentiality agreement.  Less than one hour after the ruling was issued, Horizon withdrew its bid to acquire Depomed.  The outcome highlights the importance of careful drafting of confidentiality agreements, and the need for companies to regularly monitor compliance with their obligations under pre-existing agreements.

Background:  In 2013, … Read more

Matsusaka, Ozbas and Yi

Unions and Shareholder Proposals

Invigorating the shareholder proposal process is a top priority for corporate governance reformers. But the possibility that self-interested shareholders could use proposals to harass or pressure managers to accommodate their interests is a cause for concern. Union shareholders attract more critical comments than any other group: as pension fund managers they have an incentive to press for higher investment returns, but as worker representatives they also want wage and compensation policies that benefit current members. While some observers have argued that – for statutory and strategic reasons – unions will not use the proposal process for private purposes, there is … Read more

Paul Borochin and John D. Knopf

Do Managers Seek Control and Entrenchment?

Do managers seek control of the firm, or the level of ownership consistent with entrenchment? Entrenched managers own shares within a range which is high enough to give them control, but sufficiently low to make other shareholders bear the brunt of their non-value maximizing actions. There is a large literature on how entrenched managers can benefit themselves by extracting wealth from other shareholders, but conclusive evidence that managers seek entrenchment is currently lacking.

One way to proceed is to try to infer the optimal ownership structure from the managers’ perspective from revealed preferences in existing ownership structure. Prior literature finds … Read more

Sullivan & Cromwell discusses Proxy Access 2016

As companies prepare for the 2016 proxy season, the number of adopted proxy access bylaws has almost doubled in recent months and at least two new forms of proxy access shareholder proposals have appeared. On the company side, proxy access bylaws adopted since August 1, 2015 confirm the market trend toward a 3% ownership threshold, 3-year holding period, 20% nomination limit and 20-member group limit. Trends for ancillary provisions also have coalesced to a significant extent. On the shareholder-proponent side, James McRitchie, a frequent filer of shareholder proposals and advocate for the proxy access movement, has published two new forms … Read more

Keith Czerney

Are Voluntary Internal Controls-Related Audit Report Disclosures Informative in IPOs?

The Sarbanes-Oxley Act of 2002 (SOX) requires management and auditors to opine on the effectiveness of internal controls for many public companies. One intention of SOX is to improve the reliability of information public companies provide to the financial markets (COSO 2006; PCAOB 2004). Investors in initial public offering (IPO) companies may be expected to benefit greatly from such regulation due to IPO companies’ high information asymmetry and management incentives to engage in advantageous disclosure when raising capital. At the time of the IPO, however, SOX does not require management or the auditor to opine on the effectiveness of the … Read more

Latham & Watkins discusses SEC Adopting Final Crowdfunding Rules

On October 30, 2015, the US Securities and Exchange Commission (SEC) adopted final rules to permit companies to offer and sell securities through crowdfunding (the Crowdfunding Rules).1 The Crowdfunding Rules enable investors to purchase securities in crowdfunding offerings, subject to certain limitations, and require issuers relying on the Crowdfunding Rules to disclose certain information about their business and offering, as mandated by Title III of the Jumpstart Our Business Startups Act (JOBS Act). Specifically, the Crowdfunding Rules permit an issuer to raise a maximum aggregate amount of US$1 million through crowdfunding offerings in a 12-month period and allow investors to … Read more


Is the Risk of Director Liability Really a “Myth”?

A recent scholarly article questioning the realistic financial liability exposure of corporate directors serves to prompt a larger discussion on the broad range of risks faced by directors, and actions that can be taken to mitigate those risks.

In the interesting and well-written piece, “Seven Myths of Boards of Directors”[1], Professor David Larcker and Brian Tayan identify seven common presumptions about board service that the authors believe are not substantiated by empirical evidence. “Myth Six” is that corporate directors are exposed to “significant personal legal and financial risk” arising from their service.[2] Relying in part on an … Read more

WilmerHale discusses the SEC’s Continued Review of Equity Market Structure

On October 27, 2015, the Equity Market Structure Advisory Committee (EMSAC or Committee) held its second meeting at the Securities and Exchange Commission (Commission or SEC) in Washington DC.1 The Committee is considering whether various regulatory or industry initiatives would improve the function of the US equity markets. At this meeting, the Committee focused on (1) market access fees and the maker/taker fee model and (2) the regulatory structure of trading venues. The Committee also discussed issues raised by the market disruptions that occurred on August 24.2
As an advisory committee to the SEC, EMSAC is organized and … Read more

Chao Jiang

Legal Expertise and Insider Trading

How does legal knowledge affect corporate insiders’ trading behavior? Do corporate insiders with law degrees trade differently from others? On the one hand, with a better understanding of regulations, legal insiders are more aware of the effects and risk of litigation associated with their behavior, and they may be more hesitant to make use of their private information. Also, reputation risk may make legal insiders more conservative in using non-public information for personal benefits. In this case, legal insiders would make less profit when they make inside transactions. On the other hand, legal training might help legal insiders to obtain … Read more

PwC highlights Ten Key Points from the Fed’s TLAC Proposal

The Fed proposed its long-awaited Total Loss-Absorbing Capacity (TLAC) requirements on October 30th. As expected, the Fed’s proposal came out tougher than the Financial Stability Board’s (FSB) TLAC standard proposed last year,[1] including limitations on capital distributions and bonus payments, and will likely be tougher than the FSB’s final standard expected next week. In an unusual move, the US issued its proposal before the FSB, suggesting that a consensus could not be reached in line with US regulators’ desire for more stringency.

However, the Fed did not go as far in its quantitative TLAC requirements as some feared it … Read more

Nemit Shroff

Credible Financial Statements Help Firms Raise Financing and Increase Investment

One of the primary purposes of financial statements is to facilitate the exchange of capital between investors and companies. The extent to which investors rely on the information reported in financial statements depends on the credibility of those financial statements – that is, the trust or faith investors have in the financial statements presented to them. Typically, companies establish the credibility of their financial statements by having an independent auditor verify the accuracy of those disclosures. However, the effect of auditing on financial statement credibility depends on the independence of the auditor and the rigor with which the audit is … Read more

Steven McNamara

HFT Class Action Defeats and the Challenge to Regulators

On August 27, 2015 Judge Jesse Furman of the Southern District of N.Y. dismissed plaintiffs’ claims in the consolidated high frequency trading (“HFT”) class action lawsuit In re Barclays Liquidity Cross and High Frequency Trading Litigation.[1] Coming after Judge Katherine Forrest’s similar order in Lanier v. BATS[2] in April, these dismissals likely spell the end of attempts of private plaintiffs to sue the exchanges over their alleged facilitation of abusive HFT activity.[3] The cases ran into two insurmountable barriers. The first is that many of the practices that the plaintiffs complained of were specifically approved by … Read more

Morrison & Foerster explains SEC Proposes Rule Changes to Pave the Way for Intrastate and Regional Offerings

At the same time the Securities and Exchange Commission (the “SEC”) adopted rules implementing Regulation Crowdfunding pursuant to Title III of the Jumpstart Our Business Startups Act (the “JOBS Act”), the agency proposed rule changes that could potentially facilitate intrastate and regional offerings that are subject to state blue sky regulation. In particular, the SEC proposed to modernize Rule 147 under the Securities Act of 1933, as amended (the “Securities Act”), and establish a new exemption to facilitate offerings relying upon recently adopted intrastate crowdfunding exemptions under state securities laws. The SEC also proposed amendments to Rule 504 of Regulation … Read more

Iman Anabtawi (headshot)

Predatory Management Buyouts

Even where the business judgment rule does not apply in the first instance because its preconditions are not satisfied, Delaware corporate law allows the use of ex ante procedural protections to avoid ex post substantive judicial review. D. Gordon Smith makes this point in “The Modern Business Judgment Rule,” which is forthcoming in the Research Handbook on Mergers and Acquisitions. In my forthcoming article, “Predatory Management Buyouts,” I analyze the related question whether the procedural mechanisms that, under Delaware law, boards may implement in order to “sanitize” the conflict-of-interest taint present in management buyout (MBO) transactions … Read more

Susan Gary

Fiduciary Duties and ESG Investing: Corporate Governance and the Growing Importance of ESG Reporting

Fiduciaries manage significant assets held in university endowments, pension funds, charitable foundations, and private trusts. These fiduciaries have a duty of loyalty to the purposes and beneficiaries they serve and must comply with the prudent investor standard in making investment decisions. As interest in using environmental, social, and governance (ESG) factors in investment decision making has grown, some fiduciaries have wondered whether they can engage in ESG investing without breaching fiduciary duties.

My working paper, Values and Value: University Endowments, Fiduciary Duties, and ESG Investing, explains that a fiduciary can incorporate material ESG factors into an investment strategy that … Read more

Shearman & Sterling explains Compliance with the Formal Approval Requirements of Delaware Law Required for Stockholder Ratification of Director Compensation

On October 28th, the Delaware Chancery Court, in Espinoza v. Zuckerberg, et al. (“Espinoza”)[1], held that stockholder ratification of a transaction that was approved by an interested board of directors must be accomplished formally through a vote at a stockholders’ meeting, or by written consent in compliance with § 228 of the Delaware General Corporation Law (the “DGCL”).[2] In answering this question of first impression, the Court found that Facebook’s controlling stockholder, Mark Zuckerberg, did not provide valid ratification of what the parties agreed was a self-dealing transaction when he expressed his approval of Facebook’s non-employee director … Read more


Intermediary Influence in Action: Focusing on the Core

Is “intermediary influence” all that unique? Can it be isolated? And how much harm really results? These are among the questions Professor Lawrence Cunningham poses in his thoughtful essay and recent post responding to my work on how intermediaries alter institutional arrangements in self-serving and socially costly ways. In the essay, Professor Cunningham also examines the acquisition market to provide additional evidence of intermediary influence while simultaneously introducing the question of how competition limits intermediary influence and the welfare losses that emanate from it.

Professor Cunningham concludes that “far from constituting criticism of Judge’s work, [the] questions [he raises] warrant … Read more

Larry Cunningham

The Role and Costs of Intermediaries in Financial Markets

In an important new article, Intermediary Influence, Columbia University Professor Kathryn Judge explores the persistence of high fees in the financial services sector, and attributes the costly phenomenon to political clout of financial intermediaries.  Through a series of examples from a cross section of settings such as real estate agents, stockbrokers, stock exchanges, and mutual funds, Professor Judges erects a singular framework to explain numerous examples of sustained pricing power. The unitary framework integrates concepts developed across different research fields, including transaction costs economics, agency theory, and regulatory capture.

Professor Judge’s impressive intellectual accomplishment is to unite disparate Read more

Skadden discusses Delaware Supreme Court Reaffirming Important Protections for Corporate Directors

A trio of opinions from the Delaware Supreme Court, each authored by Chief Justice Leo E. Strine, Jr., has reaffirmed Delaware’s deference to the business judgment of disinterested corporate decision-makers and restored important protections for directors that had been weakened by prior court decisions.

C&J Energy Services, Inc. v. City of Miami General Employees’ & Sanitation Employees’ Retirement Trust

First, in late 2014, in C&J Energy Services, Inc. v. City of Miami General Employees’ & Sanitation Employees’ Retirement Trust, 107 A.3d 1049 (Del. 2014), the Delaware Supreme Court vacated an injunction issued by the Court of Chancery and held … Read more

Means and Seiner

Navigating the Uber Economy

One of the most controversial issues in labor and employment law concerns how workers should be categorized in “on-demand” businesses that rely more on smartphone applications and internet connections than hierarchical supervision within traditional brick-and-mortar workplaces. For example, former drivers for ride-sharing companies Uber and Lyft have brought lawsuits alleging that they were improperly classified as independent contractors and denied employment benefits. The companies have countered that they do not employ drivers and instead license access to a platform that matches those who need rides with nearby available drivers.

At stake are the prospects, not only for Uber and Lyft, … Read more

Morgan Lewis explains New Legislation Makes Sweeping Changes Impacting All Partnerships

All partnerships will be audited at the entity level unless they have 100 or fewer partners and no partnerships as direct partners.

The two-year budget plan passed by Congress on October 30, 2015, and expected to be signed into law by President Barack Obama on November 2, 2015, includes a complete overhaul of the procedure for examining partnership returns and collecting resulting deficiencies. The legislation aims to create a single, streamlined set of partnership audit rules and repeals the 1982 Tax Equity and Fiscal Responsibility Act (TEFRA) unified partnership audit rules as well as the electing large partnership rules for … Read more

Erik Gerding

Volcker’s Covered Fund Rules: When Banking Law Borrows from a Securities Law Statute

The Volcker Rule’s covered fund provisions have not received the attention they deserve. Like the more well-studied proprietary trading rule, the covered funds rule restricts bank investments in the name of limiting their risk-taking and mitigating their contribution to systemic risk. As with proprietary trading, legislators and regulators faced a decision with covered funds on how to define those bank activities that would be off-limits. However, unlike with prop trading, Congress, and federal regulators subsequently, chose to define the scope of the covered funds rule largely by reference to an existing statute.

In a recent short article just published in … Read more

Andrew Ceresney

SEC Director of Enforcement’s, Andrew Ceresney’s, Remarks on Market Structure Enforcement: Looking Back and Forward

At the outset, let me give the requisite reminder that the views I express today are my own and do not necessarily represent the views of the Commission or its staff.[1]

Today I thought I would speak about our path-breaking enforcement work in the past few years in connection with equity market structure.  Ten years ago, there was very little enforcement focus on market structure issues.  Equity trading was highly centralized at a small number of trading venues and much of the trading was conducted manually, by people, on the floor of an exchange.  Time was measured in seconds, not … Read more

Simpson Thacher discusses ISS Issuing Draft Voting Policy Changes, Requesting Comment

On October 26, 2015, Institutional Shareholder Services Inc. (“ISS”) issued key proposed changes to its policies, inviting all interested parties to provide comment.[1] ISS will accept comments through November 9, 2015 at 6 p.m. Eastern Time. If adopted, ISS’s proposed policy changes will take effect for meetings occurring on or after February 1, 2016.

ISS proposes three significant changes that will affect issuers subject to ISS’s U.S. proxy voting guidelines:

  1. Director Overboarding

ISS’s policy on director overboarding affects directors who sit on what ISS considers to be an “excessive number of boards.” Under its current policy, ISS recommends a … Read more

Arthur Wilmarth

The Financial Industry’s Bankruptcy Plan for Resolving Failed Megabanks Would Give Unwarranted Benefits to Their Executives and Wall Street Creditors

In a recent post,[1] I summarized my forthcoming article critiquing the financial industry’s plan for resolving failed megabanks under Title II of the Dodd-Frank Act.[2] My article describes the industry’s “single point of entry” (SPOE) strategy for recapitalizing and reorganizing failed megabanks. I argue that the industry’s SPOE strategy is designed to provide full protection for Wall Street creditors of failed megabanks while imposing the costs of rescuing those banks on ordinary investors and/or taxpayers.

The financial industry has also proposed a new “Chapter 14” of the Bankruptcy Code, which would authorize federal bankruptcy courts to adopt an … Read more

Mayer Brown explains Prudential Regulators’ Adoption of Margin Rules for Swaps and Security-Based Swaps

On October 22, 2015, the OCC, the Board of Governors of the US Federal Reserve System, the FDIC, the Farm Credit Administration and the Federal Housing Finance Agency (collectively, the “Agencies”) adopted (i) a joint final rule1 to establish minimum margin requirements for registered swap dealers, major swap participants, security-based swap dealers and major security-based swap participants (collectively, “swap entities”) for which one of the Agencies is the prudential regulator2 (“covered swap entities” or “CSEs”) and (ii) a companion interim final rule3 (and request for comment) to implement margin exemptions added by the Terrorism Risk Insurance Program … Read more

Brett McDonnell

Benefit Corporations: Do the Benefits Exceed the Costs?

Benefit corporations are a hot new innovation in corporate law. In just a few years over half of the states have adopted benefit corporation statutes, aiming to provide a form of business association adapted to social enterprises which blend profit-making with other social purposes. Between 1,000 and 2,000 businesses have adopted the new form so far. Is there a need for benefit corporations? What explains the political success of this legal innovation? And what will it take for benefit corporations to become a widely-used tool?

The entrepreneurs who found, and other investors who help fund, social enterprises want to do … Read more