The validity of whistleblower reports based on secondhand information has been called into question by President Trump:
A whistleblower with second hand information? Another Fake News Story! See what was said on the very nice, no pressure, call. Another Witch Hunt!—President Donald J. Trump Twitter @realDonaldTrump
The Inspector General of the Intelligence Community (ICIG) seemed to hold a similar view of secondhand reports. An earlier version of ICIG Form 401 stated ICIG protocol as:
FIRST-HAND INFORMATION REQUIRED. In order to find an urgent concern ‘credible,’ the ICIG must be in possession of reliable, first-hand information. The ICIG cannot transmit … Read more
In a recent article, I highlight the links among initial coin offerings (ICOs), cryptocurrencies, stablecoins, and central bank digital currencies (CBDCs). Although these entities exist in different contexts (securities law and capital formation, payment systems, monetary policy), they are intertwined and share an evolutionary process.
ICOs raise issues related to securities law because digital tokens are tokenized equities and, therefore, securities. At the same time, they have increased the amount of outstanding cryptocurrencies and, as a result, highlighted the problems generally associated with money, in the context of cryptocurrencies.
Cryptocurrencies, including Bitcoin, have suffered tremendous volatility, impairing their role as … Read more
Proxy advisory firms Institutional Shareholder Services (ISS) and Glass Lewis recently announced updates to their U.S. proxy voting policies for the 2020 proxy season. ISS’s new policies will apply to shareholder meetings held on or after February 1, 2020 and Glass Lewis’s new policies will apply to meetings that are held on or after January 1, 2020.
ISS Benchmark Policy Changes. ISS had previously released draft proposals on several of the proposed changes in October. Changes to non-U.S. voting policies covering Europe, the Middle East and Africa, and Asia have also been announced. Notable updates to ISS’s U.S. voting … Read more
Recent regulatory reforms in advanced economies have empowered shareholders by letting them vote on executive compensation, corporate transactions, changes to the corporate charter, and social and environmental proposals. This shift of power from boards to shareholders assumes that shareholder voting increases welfare and firm valuations. It applies the logic of political democracy and takes for granted that aligning the preferences of those who make decisions with those for whom decisions are made – a form of corporate democracy – is optimal.
In our paper, Trading and Shareholder Voting, we question this argument. The corporate setting is very different from … Read more
On November 5, 2019, at an open meeting the SEC voted (3 to 2) to propose amendments to the proxy rules. The proposed amendments relate to regulating proxy advisory firms. The Commission also voted to propose amendments with regard to shareholder proposals, including eligibility standards for submission and resubmission. Chairman Jay Clayton observed that the proposals were “rooted in two essential aspects of effective regulation: modernization and retrospective review.”
The SEC is soliciting public comment, through numerous questions in both proposals covering a range of topics and alternatives, for 60 days after their publication in the Federal Register.
… Read more
Common ownership – the phenomenon of firms sharing stockholders with industry competitors – is becoming ubiquitous, with 82 percent of S&P 500 firms having common ownership at the end of 2015 compared with just 17 percent in 1990.
At least in theory, a cross-owner has incentives to reduce competition among its portfolio companies because doing so may boost their earnings (likely at the cost of consumers or other companies). For example, common ownership within the finance industry has been found to reduce interest rates that savers receive on their deposits, while common ownership between airline companies tends to raise air … Read more
Shareholder proposals urging corporate boards to report on climate‑related risk made headlines in 2017 when they earned majority support from investors at ExxonMobil, Occidental Petroleum, and PPL. The key to this historic vote was the support of the Big Three index fund managers – BlackRock, State Street, and Vanguard, which broke with management and cast their votes for the proposals. The 2018 proxy season saw several more climate‑related proposals earn majority support, and in 2018 and 2019 record numbers of proposals were withdrawn after the companies agreed to respond to shareholders’ requests.
The highly visible 2017 proposal, … Read more
Over the past half dozen years, the three of us have written a number of papers on sovereign bond contracts. In the first set of papers, we documented the stickiness phenomenon (the reluctance of lawyers to modify standard contract language even though obsolescence posed a significant risk of misinterpretation). In the second set of papers, we studied the phenomenon of random mutations to the standard form language that occurred without an apparent rational purpose (here, here, and here). Both findings seemed completely at odds with the standard account of how sophisticated lawyers drafted multi-billion dollar financial … Read more
In response to the sharp increase in campaigns by activist hedge funds in France and Europe generally, a French commission has conducted an extensive investigation and issued a carefully researched, reasonable and balanced report recommending regulatory and procedural changes to rebalance the relationship between companies and activists. The key recommendations are:
- “[S]tronger transparency measures applicable to investors taking public positions, directly or indirectly, aimed at influencing an issuer’s strategy, financial position or governance. An activist taking a public position should disclose, inter alia, the number of shares and voting rights and the type of securities held in the issuer,
… Read more
On October 15, 2019, the U.S. Supreme Court heard oral arguments in Financial Oversight and Management Board for Puerto Rico v. Aurelius Investment, a case that centers on the constitutionality of the appointment process for the members of the federally established board charged with restructuring Puerto Rico’s over $100 billion in debt. In addition to shedding light on this narrow question about debt, bankruptcy, and the U.S. Constitution, the case highlights the larger, longstanding political and economic plight of over 4 million Americans living in the unincorporated territories of the United States (the “Territories”): Puerto Rico, Guam, American Samoa, … Read more
Leo E. Strine, Jr. has long had a bully pulpit in corporate law, first on Delaware’s Court of Chancery and then as chief justice of the Delaware Supreme Court. Bully pulpits are good things for the occupants but can be a bit infuriating for those in the congregation. Such is the case with Chief Justice Strine’s recent article, “Toward Fair and Sustainable Capitalism.”
Strine argues that companies are too beholden to stock markets, fail to make long-term investments, and fail to share gains between shareholders and workers. He provides a list of proposals that are fairly characterized as arguing … Read more
Centros, a landmark 1999 decision by the European Court of Justice (now Court of Justice of the European Union or CJEU), has profoundly transformed European company law. Previously, many EU member states used the “real seat theory” to hinder regulatory arbitrage. Under this theory, a company had to incorporate pursuant to the procedures of the jurisdiction where its administrative center was located. For example, for a firm with its headquarters in Germany to acquire full legal status in the eyes of German courts, it had to be formed under German law. The theory was not aimed at protecting … Read more
On October 22, 2019, the Federal Trade Commission announced the first-of-its-kind enforcement action and settlement against the developer and marketer of three tracking applications, Retina-X Studios, LLC and James N. Johns, Jr. In this unprecedented action, the FTC alleged that Retina-X and Johns failed to take basic steps to protect sensitive personal data collected from their so-called “stalking” mobile applications, in violation of the Federal Trade Commission Act, 15 U.S.C. § 45(a) and the Children’s Online Privacy Protection Act (“COPPA”) Rule, 16 C.F.R. § 12. The FTC’s action may presage further enforcement activity against firms and individuals providing technology that … Read more
Most everyone has had their say about the collapse of WeWork’s failed initial public offering (“IPO”). Clearly, this failure was overdetermined, as many competing causes can explain it, including: (1) the extraordinary level of self-dealing that its CEO, Adam Neumann, regularly engaged in; (2) the corporate governance structure that locked up all voting power and control in him; (3) a system of non-GAAP metrics that more than raised eyebrows; (4) an extraordinarily high valuation for a company that, despite its claims of being a high-tech start-up, was closer to a simple real estate firm; and (5) the unstable personality … Read more
In 2018 and 2019, the SEC released the first amendments to Regulation S-K to emerge from its decades-long project to “modernize and simplify” the disclosure obligations that apply to publicly traded companies. New proposed amendments released for public comment in August are currently pending. Largely missing, however, are changes to the basic rules governing how companies provide information to investors about risk, including emerging environmental, social, and governance (ESG) risks. The SEC’s caution is due largely to persistent concerns in the business community that any effort to standardize how companies report ESG risk factors will overload investors and obscure … Read more
If you google “Lithuania e-money,” the auto-fill function will suggest that you search for ”Lithuania e-money license.” If you accept the tip, the first result will be Ecovis, which describes itself as “the most experienced finance institution and FinTech licensing advisor” for Lithuanian licenses. The second Google result is SB-SB Legal Services, which has a more global reach and boasts of being “capable of proposing a wide choice of countries suitable for the registration of payment systems. We offer electronic money licenses in European countries, including Lithuania, Malta, Czech Republic, Cyprus, Estonia, Bulgaria, Switzerland, Great Britain and Gibraltar,” in addition … Read more
On October 8, 2019, the Criminal Division of the U.S. Department of Justice (“DOJ” or the “Government”) issued new guidance for federal prosecutors to follow when corporations claim they are unable to pay a criminal fine or monetary penalty. For years, the DOJ’s Civil Division has employed an “inability to pay” process for resolving civil claims under the False Claims Act. Now, the Criminal Division has delineated its own process in a memorandum from Assistant Attorney General Brian Benczkowski titled, “Evaluating a Business Organization’s Inability to Pay a Criminal Fine or Criminal Monetary Penalty” (the “Memorandum”). The DOJ’s new … Read more
Shareholder cooperation is on the rise as a tool for active corporate ownership and a way to effectively voice concerns about corporate governance and performance. While “wolf packs” of activist hedge funds that aim to bring about significant corporate change at targeted companies have attracted the most attention, there are other forms of shareholder coordination that are not activist-driven.
One is collective engagement by institutional investors guided by the recommendations in stewardship principles adopted in several countries. Over the last few years, representative organizations such as, to some extent, the Council of Institutional Investors (CII) in the U.S. and, to … Read more
There are three main theories of the corporation as a legal entity: the concession theory, the real entity theory, and the aggregate (contractarian) theory. Once the most prominent of the three, the concession theory fell out of favor long ago but seems to be making a comeback, due in large part to Senator Elizabeth Warren and her Accountable Capitalism Act (the “ACA”).
The Rise and Fall of the Concession Theory
The concession theory holds that corporate personhood and associated privileges are granted to corporations by the state where they are incorporated. In other words, the theory posits that it … Read more
Securities class actions may deter financial misreporting and flawed disclosure, but how effective are they at deterring managers from taking actions that sacrifice long-term value for higher profits? In a recent paper, we uncover a novel mechanism that extends the disciplining effect of litigation to such managerial actions, often referred to as real earnings management (REM).
Real earnings management differs from accrual earnings management, in which managers cook the books to overstate earnings, in that REM does not violate financial reporting rules. Instead, it allows managers to report higher profits in the short run via real choices that boost short-term … Read more
The catchphrase “too much information” can be applied in many circumstances, personal and social, but not, surely, in relation to financial markets.
It has long been held that greater transparency, thus more information, can only increase the volume of trading and improve liquidity.
In conventional thinking, illiquid markets are an expression of the sort of information asymmetry that causes spreads to widen as traders seek protection against the possibility that their counter-parties know something that they do not. Transparency reduces such information asymmetry, thereby improving liquidity.
That indeed has been the accepted wisdom – until now.
Our findings suggest that … Read more
How has the U.S. Tax Cuts and Jobs Act of 2017 changed corporate behavior? In addition to reducing the corporate income tax rate to a flat 21 percent from a high of 35 percent, the TCJA changed other important rules on earnings stripping, expensing and depreciating, net operating losses, and the taxation of foreign subsidiaries. These changes generally reduced the effective and marginal tax rates of U.S. corporations. Using the first set of post-TCJA 10-K reports, our analysis seeks to provide a preliminary assessment of the extent to which these benefits have motivated corporations to do what TCJA proponents hoped.… Read more
One of today’s most pressing antitrust questions is how antitrust should address the conduct of dominant technology companies, such as Amazon, Facebook, and Google. Once heralded as the champions of innovation and the modern economy, these companies are now the subject of growing calls for their breakup, including through actions by the federal antitrust agencies to challenge and unwind key mergers in the technology industry, including Facebook-Instagram, Amazon-Whole Foods, and Google-DoubleClick.
But nearly every one of the technology mergers identified for challenge and breakup was previously reviewed and cleared by the antitrust agencies pursuant to the existing federal merger review … Read more
It is widely accepted among investors that compensation committees should align executive pay with performance in part by using incentive metrics that contribute directly to shareholder value. For this reason, it is common for incentive metrics to overlap with performance highlights relayed in press releases communicating quarterly earnings. Planting its latest performance measurement flag in the ground, Institutional Shareholder Services (ISS) introduced economic value added (EVA), contending that EVA is better than commonly used metrics such as EBITDA, EPS, and others. Compensation committees may wonder, is EVA really a better gauge of value than their earnings release metrics? Does ISS … Read more
Institutional investors have in recent years become the largest equity holders in the U.S., owning about 80 percent of the market value of S&P 500 index stocks and more than 70 percent of the shares of the 10 largest U.S. firms (Mcgrath, 2017). As a result, institutional investors’ power and influence on corporate decision-making have grown, increasing concerns about whether they actively monitor firms and exercise stewardship to enhance firms’ long-term sustainable value.
Do institutional investors act in short-sited ways, interested mainly in boosting short-term share prices, or do they encourage management to invest for the long-term? The answer, and … Read more
M&A activity in the U.S. and worldwide declined against many indicators in September, confirming numerous recent reports that dealmaking has taken a downturn. While the number of deals rose by 13.9% in the U.S., to 803, and by 7.6% globally, to 2,806, their total value fell by 41.0% in the U.S., to $71.49 billion, and by 28.0% globally, to $187.97 billion. Average deal value also decreased by 48.2% in the U.S., to $89.0 million, and by 33.1% globally, to $67.0 million. Figure 1.
Strategic vs. Sponsor Activity
Similarly, while the number of strategic deals increased in the U.S. … Read more
The U.S. Securities and Exchange Commission (SEC) has increased the regulation of asymmetric information-based trading, aiming to mitigate disclosure of material private information to select market participants. These efforts have not been fully successful, raising questions about the impact of asymmetric information on private equity trades, informed trades, and expected gains. The integrity of competing market structures and market makers’ rent has heightened the need to understand and measure the cost components of the market maker bid-ask spread. Whether the existence of private information in takeovers through selective disclosure is harmful to financial markets is still uncertain. Inside information is … Read more
The Business Roundtable’s recent call for a commitment to long-term sustainable economic value creation has prompted a vigorous debate about the optimal corporate governance model for achieving that goal.
Certain familiar arguments have reappeared in reaction to the Business Roundtable’s important statement rejecting shareholder primacy and embracing stakeholder governance. Various law firms and commentators insist that such innovation in corporate governance is constrained by an imperative to maximize shareholder value—the ideology that a corporation can have no purpose other than profit maximization for shareholder gain. Others assert that the path to effective governance reform lies with prescriptive regulation, presumptively by … Read more
In a forthcoming paper, we explore the stock prices of companies during the period just before to just after an announcement that they have been hit with a computer breach. We analyze all available public equity data by breach type and industry from 2005 through 2017 and find that, prior to the announcement of a breach, the mean cumulative abnormal return (CAR) on the target’s shares is typically negative. Moreover, following the breach announcement, the mean CAR is typically positive, often larger than the initial CAR decline.
Counterintuitively, following the breach announcement, an increase in stock price is more likely … Read more
A lively debate has been sparked both among the public and scholars about the protection of informants, prompted in part by the whistleblowers who uncovered the scandals that recently attracted so much interest in the media, including Cambridge Analytica, the Panama Papers or LuxLeaks. One topic under discussion is the extent to which whistleblowers should enjoy “the legal regime’s blessing” and be protected against sanctions, inter alia, under labor or criminal law, in view of the tension between private interests in the protection of internal matters and the public interest in uncovering legal violations and internal irregularities.
Under … Read more
In a recent opinion piece in the Financial Times, Harvard Law School Professor Jesse Fried makes a strong case that the Business Roundtable’s CEOs statement, in which they committed to “lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders,” by itself will not affect how CEOs run their companies. This is surely correct. But he overstates his case by treating the current “shareholder primacy” system of corporate governance as both the historical norm and the ideal system.
Fried bases his argument for shareholder primacy on the binding contractual nature of corporate … Read more
Global financial markets are preparing for the phasing out of the London interbank offered rate, or LIBOR, with the loan, derivatives, securities, and bond markets most affected. As of mid-2018, about $400 trillion worth of financial contracts referenced LIBOR in one of the major currencies. Supervisory pressure on the financial sector to reduce LIBOR inventories suggests that firms must embrace Risk Free Rates (RFRs) across LIBOR portfolios. The transition presents a multitude of challenges.
Why Use Benchmarks?
Financial market participants rely on benchmarks primarily to reduce asymmetric information about the value of the traded financial instrument underlying the benchmark … Read more
Directors of a Delaware corporation must act in the best interest of the corporation and its shareholders. Other stakeholders – such as employees, creditors, customers, and suppliers – may only be considered by directors to the extent there are rationally related benefits to the welfare of shareholders. The preceding two tenets of Delaware law may on occasion appear to pose challenges to a corporate board considering an environmental or social initiative that cannot readily be supported by traditional metrics of long-term financial value for shareholders. However, I submit that boards have the discretion to take an expansive … Read more
After letting the option go unused for more than 20 years, the Antitrust Division of the Department of Justice recently announced it would use arbitration to settle its challenge of the proposed merger of two aluminum producers. In a press release last month, the Division acknowledged that this is the first time its history that it has used arbitration rather than litigation as a means to resolve an antitrust challenge. The emergence of arbitration as an alternative to litigation raises questions about its proper mechanisms and its potential impact on the merger review process.
Novelis-Aleris Agreement and Rationale
On Sept. … Read more
On October 23, the Securities and Exchange Commission is scheduled to vote on whether to adopt proposed amendments to the rules governing its whistleblower bounty program. The most controversial proposed amendments are to Rule 21F-6, which governs the way the SEC calculates the amount of an award. In a recent paper, available here, I analyze the wisdom of the proposed amendments to Rule 21F-6. My take: They are wise, but incomplete.
Under the Dodd-Frank Act, SEC whistleblowers are entitled to between 10 and 30 percent of the money collected by the SEC in an enforcement action that the whistleblower’s … Read more
Earlier this month, the Delaware Court of Chancery denied defendant directors’ motion to dismiss a duty-of-oversight claim brought by plaintiff shareholders in In re Clovis Oncology, Inc. Derivative Litigation. This decision, together with a similar June 2019 ruling by the Delaware Supreme Court in Marchand v. Barnhill, confirms the prospect of liability for corporate directors who do not work hard enough to establish and monitor effective risk-management procedures at their companies. The two rulings therefore deliver timely lessons regarding directors’ duty of oversight under Delaware’s Caremark standard. The rulings are especially important for directors of companies whose … Read more