After Delaware prohibited fee-shifting provisions in corporate bylaws, scholars considered alternate means by which corporations might use private ordering to limit the ability of stockholder plaintiffs to bring lawsuits challenging corporate actions. For instance, Professor Sean Griffith suggested that corporations should adopt “no pay” provisions that, unlike fee-shifting provisions, would prohibit a corporation from paying the legal fees of stockholder plaintiffs. Griffith’s proposal is similar to one put forward by another Delaware practitioner shortly before the fee-shifting ban. Other commentators have suggested that such “no pay” bylaws may be the wave of the future.
“No pay” … Read more
In early February, Justice Randy Holland, the longest-tenured member of the Delaware Supreme Court, announced his plans to retire at the end of March 2017. At the time of his appointment in 1986 by Governor Michael N. Castle, Justice Holland was the youngest person ever to serve on the Court. He became its longest serving member in 2009.
According to our research, during his 33-year tenure, Justice Holland authored over 800 electronically reported decisions and imparted a legacy of addressing several key areas of Delaware corporate law. In reviewing his most cited decisions, it is clear Justice Holland has left … Read more
Bailing out big financial institutions during the financial crisis was unpopular from the beginning. It was done in part because the bankruptcy code provision for the resolution of big institutions was widely considered inadequate to preserve the nation’s financial stability. Congress approved Title II of Dodd-Frank in 2010 to provide better safeguards by enhancing the FDIC’s authority and creating the Orderly Liquidation Fund. However, the changes remain unpopular in the financial world. Title II opponents in Congress now propose amending the bankruptcy code to include a new Chapter 14 to create special provisions for the bankruptcy of large … Read more
Many financial institutions1 have implemented the three Lines of Defense (LoD) model to help define their risk management frameworks and bolster supervisors’ (e.g., desk heads and senior traders) abilities to monitor risk.2 However, as frameworks for managing financial risks (e.g., credit, market, and liquidity) have become more developed, regulators are increasingly focusing on oversight of non-financial risks (e.g., operational and conduct).3
Supervisors are often not only expected to design, manage, and execute a financial institution’s first LoD controls framework, but to do so while meeting (or exceeding) revenue expectations. In order for supervisors to meet the expectations of … Read more
Corporate settlements are proliferating in form and function. They include consent decrees, corporate integrity agreements, deferred prosecution agreements, non-prosecution agreements, leniency agreements, and plea bargains. Enforcers at the federal and state level now enter an array of administrative, civil, and criminal resolutions of enforcement actions against companies. Those resolutions may be entered and negotiated in parallel and settled jointly, and their reach is global. Corporate fines have hit new records, with penalties in the hundreds of billions of dollars affecting entire industries and economies. High-profile controversies have erupted over judicial review of government settlements with corporations, as these agreements have … Read more
Over the past few years, interest in corporate social responsibility (“CSR”) has increased significantly. The spotlight on CSR has led companies to expand and strengthen their CSR efforts. Many companies in turn have published sustainability reports, posted materials on their websites and made other statements about their past CSR efforts and future CSR goals. Certain website CSR disclosures are also required by statutes such as the California Transparency in Supply Chains Act of 2010 and the U.K. Modern Slavery Act 2015. Some organizations are also encouraging companies to include more CSR statements in their filings with the Securities … Read more
The New York Stock Exchange requires that the board of each publicly traded corporation “conduct a self-evaluation at least annually to determine whether it and its committees are functioning effectively.” The purpose of this exercise is to ensure that boards are staffed and led appropriately; that board members, individually and collectively, are effective in fulfilling their obligations; and that reliable processes are in place to satisfy basic oversight requirements.
Research evidence suggests that, while many directors are satisfied with the job that they and their fellow board members do, board evaluations and boardroom performance fall short along several important dimensions. … Read more
M&A activity generally declined in February 2017, both globally and in the U.S. Total deal volume, as measured by dollar value, decreased globally by 30.1% to $202.45 billion, and in the U.S. by 3.7% to $106.47 billion. The number of deals followed similar trends, decreasing globally by 8.4% to 2,858 and decreasing in the U.S. by 10.2% to 828. These declines were primarily driven by declines in strategic M&A activity. Globally, strategic deal volume decreased by 40.6% to $144.56 billion and the number of deals decreased by 10.4% to 2,520. In the U.S., strategic deal volume decreased by 2.7% to … Read more
Of the nearly 6,000 U.S. firms that conducted initial public offerings between 1980 and 2008, 38 percent became merger bidders within three years after the IPO and 12 percent became takeover targets. It is important that investors understand these developments, given how often post-IPO M&A activity occurs and how much it can affect the value of companies.
Take for instance First Solar and Paypal. First Solar, the second largest maker of solar panels worldwide, explicitly disclosed that a primary use of its 2006 IPO proceeds would be to engage in acquisitions to achieve vertical integration. Not surprisingly, First Solar acquired … Read more
Developments in private and public markets are changing the role equity plays in the United States, i.e., what “stock” means as a matter not only of investment and corporate governance, but also of political economy. For several generations, a broad middle class invested directly in bureaucratically run corporations, disciplined by securities and other laws. The governance of firms and therefore much of the economy was answerable to this broad middle class. Perhaps most important, citizens understood such arrangements as “the free enterprise system” or even “the American way.” We call this a “republican” imagination of equity markets.
There has recently … Read more
The election of Donald Trump in November has substantially increased the likelihood of major tax reform in the near future. While it is uncertain what shape such reform will take, there has been renewed interest in the so-called “Blueprint” for tax reform released by House Republicans on June 24, 2016. The Blueprint’s stated aims are to promote economic growth for American business, incentivize companies to remain in the United States and greatly reduce the complexity of the current tax system. To promote these objectives, the Blueprint advocates the replacement of the current corporate income tax with what is referred … Read more
The practice of nominal shareholder plaintiffs challenging virtually every sizable corporate merger with a lawsuit alleging a fiduciary breach has been a scandal for some time. At least when brought by the “bottom fishers” of the plaintiff’s bar, these suits result invariably in a nonmonetary, “disclosure only” settlement that benefits no shareholder, but does justify an award of fees to the plaintiff’s attorney (the only party with an economic interest in the suit).
The near inevitability of M&A litigation is a relatively recent phenomenon, as the rate soared after 2000. One study finds that only 12 percent of M&A transactions … Read more
On February 27, 2017, the European Commission published a Staff Working Document containing an assessment of EU equivalence decisions in financial services policy. Equivalence decisions are a core element of the Commission’s international strategy for financial services and provide benefits for both EU and third-country financial markets. If the Commission determines that a third country’s regulatory, supervisory and enforcement regime is “equivalent” to the corresponding EU framework in a particular market sector, that recognition usually makes it possible for authorities in the European Union to rely on supervised entities’ compliance with the equivalent foreign framework.
This reduces or … Read more
On March 1, 2017, the Office of the U.S. Trade Representative (“USTR”) released its National Trade Policy Agenda for 2017 (“Trade Agenda”) describing the President’s trade policy objectives. The Trade Agenda is consistent with President Trump’s campaign promises to fundamentally alter U.S. trade policy by pivoting away from multilateral negotiations and organizations. As a result, companies with any international dealings should closely follow the Trump Administration’s implementation of this significant change of course in U.S. trade policy.
- Key Objectives of the Trade Agenda
The Trade Agenda sets out several customary international trade goals, such as increasing economic growth and job … Read more
In the past 20 years, many corporate law scholars have come to the view that governance arrangements protecting incumbents from removal are what really matter for firm value, arguing that such arrangements help entrench managers and harm shareholders. A major factor supporting this view has been the rise of empirical studies using corporate governance indices to measure a firm’s governance quality. Providing seemingly objective evidence that protecting incumbents from removal reduces firm value, these studies have encouraged the idea that good corporate governance is equivalent to stronger shareholder rights.
In our recent article, we challenge this idea, presenting new empirical … Read more
2017 has started with a bang on the data protection front. The new EU General Data Protection Regulation (GDPR) which is intended to harmonise data protection legislation across the EU, was adopted in April last year and is due to come into force in May 2018. The UK’s data protection regulator (the Information Commissioner’s Office, or ICO) has been consistent in its support for preparation of the GDPR in the UK following the Brexit vote last year. In January this year, we saw the ICO provide an update on the GDPR guidance that it will be publishing for organisations in … Read more
In 2016, the Securities and Exchange Commission (SEC) issued a Concept Release on Regulation S-K as part of its comprehensive review of the effectiveness of federal disclosure rules. The release included for the first time a request for comment on whether and how sustainability information should be incorporated into periodic reporting under federal securities law. The SEC previously issued guidance in 2010 showing how information on material climate-related risks should be disclosed in companies’ financial reports. Other studies have also shown that nonfinancial information (referred to generally as “environmental, social, and governance” (ESG) disclosure) is material to firms, depending on … Read more
Professor Lynn LoPucki of UCLA School of Law speaks with Reynolds Holding about the competition among states for corporate charters. Many people assume that the game is over and Delaware — the corporate home of more than half of U.S. public companies — has won. But as Professor LoPucki explains, Delaware is vulnerable, the competition continues, and as a result the regulation of corporations in America is just about non-existent. Click on “read more” to hear the conversation — on the Blue Sky Banter podcast… Read more
A central topic in financial economics is how the allocation of cash flow and control rights among providers of corporate finance should evolve with firm performance. Theoretically, allowing for a transfer of control to creditors when a firm is in default can alleviate agency problems resulting from the separation of ownership and control, as well as conflicts of interest between debt and equity holders (Jensen and Meckling, 1976). Empirical evidence confirms that governance by creditors has profound effects on not only bankrupt firms (Gilson, 1990), but also a broad spectrum of firms that are merely in technical default.… Read more
There is a certain immediate attractiveness associated with the idea of impact investing. The objectives of many impact investors are in some ways similar to those of many critics of capitalist societies: both groups want to contribute to the achievement of various socially worthy objectives that the market does not seem to satisfy by itself, at least not to a sufficient extent. But unlike anti-capitalist political activism, which is based on the beliefs that markets are inherently flawed, impact investing looks like a classic affirmation of the market: by putting his money where his mouth is, an impact investor may … Read more
The so-called “short-swing profit rule” under Securities Exchange Act Section 16(b) generally prohibits officers and directors as well as 10 percent shareholders of a U.S. public company from profiting from any purchase or sale (or sale and purchase) of the company’s equity securities within a period of less than six months. However, Rule 16b-3 permits a company’s board of directors and qualifying board committees to take actions that exempt from the short-swing profit rule most transactions under the company’s equity-based compensation programs.
For example, many companies take steps so that the common practice often referred to as “net settlement,” in … Read more
In an article to be published in the Minnesota Law Review, I use systems-strategic analysis to explore the role of charter competition in corporate law. A systems-strategic analysis begins by identifying a law-related system for study, then describes how the system functions, and finally infers from that function what goals the system is pursuing. The system analyzed in this article is the system by which American corporate law is produced, adopted, and enforced—the corporate charter competition. Although charter competition extends to private corporations and other types of entities, I limited my analysis to the public company context because the competition … Read more
On March 1, 2017, the Securities and Exchange Commission (“SEC”) issued a notice and request for comment, together with proposed and final rules intended to update certain disclosure requirements:
- Hyperlinks to Exhibits in SEC Filings. The SEC adopted a final rule requiring issuers to include a hyperlink to each exhibit in the filing’s exhibit index. The rule, originally proposed in August 2016, becomes effective September 1, 2017, or September 1, 2018 for smaller reporting companies and companies that are neither large accelerated filers nor accelerated filers.
- XBRL Reporting Requirements for IFRS Users. The SEC issued a notice that
… Read more
Mandatory disclosure sits at the foundation of modern securities regulation. Public companies must produce and share a wide variety of information about their condition and prospects, and they must do so on their own dime.
There can be little doubt that corporate information has great social value. Much has been written on the connection between more informative securities prices, on the one hand, and improved capital allocation and corporate governance, on the other. Nevertheless, it is equally as clear that having the government dictate the amount, format, and timing of corporate disclosure will leave society with less than the optimal … Read more
It has long been a policy of corporate law1 that the informed business decisions of independent and disinterested directors are protected by the presumption of the business judgment rule.2 Courts are reluctant to second-guess decisions that are made by directors in good faith and with the requisite degree of care. This reluctance remains evident in the recent decisions of Delaware courts, holding, in two lines of cases, that the presumption of the business judgment rule should apply both to certain transactions involving conflicted controlling stockholders and to transactions not involving conflicted controlling stockholders, that would otherwise be subject … Read more
Crowdfunding is an exciting development that uses the power of the internet to allow entrepreneurs and startups to efficiently raise financing from a large number of people who each contribute a small amount of money. It breaks with the past by enabling companies to locate investors through a passive internet platform rather than through the active selling efforts of a traditional broker-dealer intermediary. Websites like Kickstarter, Indiegogo and GoFundMe helped popularize the concept and led Congress to legalize a variety of new ways for companies to raise capital through sales of stock and other securities. Regulation Crowdfunding (“Reg CF… Read more
The Department of Justice (DOJ or Department) released updated guidance on the Antitrust Division’s Leniency Program, on January 17, 2017.1 The Leniency Program allows corporations and individuals who self-report their cartel activity and cooperate in the Antitrust Division’s (Division) investigation of the cartel to avoid criminal conviction, fines and prison sentences.2 The program has become an important tool for the Division in its investigation and prosecution of criminal cartel activity. In 2008, the Division issued “Frequently Asked Questions Regarding the Antitrust Division’s Leniency Program and Model Leniency Letters” to provide guidance to individuals and corporations seeking to utilize … Read more
On February 3, 2017, the Federal Trade Commission (“FTC”) released a report on an internal staff study examining the success of the Commission’s merger remedies from 2006 to 2012. The report, which also focuses on the remedy process more generally, is a follow up to the Commission’s first remedy study, released in 1999.
The FTC has received some criticism in the recent past about the perceived lack of success of a few of its merger consent decree remedies. But the report found that the remedy process was generally effective and that most remedies proposed by the FTC succeeded in … Read more
President Trump has repeatedly used his Twitter account to single out companies for criticism of their business practices, raising the question for a broad range of public companies of how to prepare for and potentially respond to such criticism. Of course, rhetorical attempts by politicians to influence the conduct of private enterprise – commonly referred to as “jawboning” – are an old political tactic. The nature and frequency of jawboning in the current environment makes this a serious issue for boards and management at a wide variety of public companies, in a way that it has not been in … Read more
In our recent paper, we provide strong empirical evidence that banks play an active role in shaping borrowers’ tax planning. Our evidence is drawn from a comprehensive analysis of the impact of debt covenant violations on corporate tax avoidance.
Covenants must be maintained while the debt is outstanding and are tripwires for trouble. A violation of a covenant can put the borrowing firm into technical default and lead to the transfer of control rights to creditors, who then step in and exert strong influence over managerial decisions.
Using a large sample of covenant violations by U.S. public firms between 1997 … Read more
In his statement announcing the appointment of Jay Clayton to run the Securities and Exchange Commission (SEC), President Donald Trump said that “we need to undo many regulations which have stifled investment in American businesses, and restore oversight of the financial industry in a way that does not harm American workers.” Taken together, President Trump’s emphasis on deregulation, his statement in connection with Clayton’s appointment and Clayton’s professional experiences indicate a clear intention to shift the SEC’s agenda in terms of both regulation and enforcement priorities.
Leadership changes throughout the SEC will position the agency to implement these changes this … Read more
Although U.S. corporate law has traditionally been left to the states, it is widely understood that a host of federal actors can and do affect the broader rules of corporate governance in fundamental ways. How might the corporate governance landscape change, then, in response to the tectonic shifts recently experienced in American politics – forces reflected most dramatically in the November 2016 election? Discerning how such dynamics might affect corporate governance moving forward naturally requires a thorough reckoning of how state and federal political forces have affected the field’s development to date. In a recent paper, I provide such … Read more
On January 31, 2017, President Trump announced the nomination of Tenth Circuit Judge Neil Gorsuch to fill Justice Antonin Scalia’s former seat on the U.S. Supreme Court. This note reviews Judge Gorsuch’s approach to antitrust issues as reflected in his opinions.
During his decade on the bench, Judge Gorsuch’s most significant antitrust decisions have addressed refusals to deal. He has authored two refusal to deal opinions and joined another, deciding in each case that the plaintiffs had failed to show that the defendants had sacrificed short-term profits in pursuit of a longer-term anticompetitive goal. His view of the refusal to … Read more
The Delaware Chancery Court’s vice chancellor speaks with Reynolds Holding about Dell, DFC Global and appraisal actions, which allow holdout shareholders who didn’t vote for a deal to ask the court to set a higher price for their stock. The big issue: Why isn’t the merger price necessarily fair value? Click on “read more” to hear the conversation — the inaugural edition of the Blue Sky Banter podcast.… Read more
Mergers and acquisitions (“M&A”) of bank holding companies (“BHCs”) and banks are subject to lengthy and sometimes unpredictable regulatory scrutiny and application processing between signing and closing. Bank M&A applications are subject to numerous regulatory risks, including preexisting conditions that are unknown or whose importance to the process is underestimated when the deal is signed, changes in the merging parties’ businesses, changes in regulatory views or policies, and new regulatory examinations or findings. Market, economic, and credit conditions, as well as the parties’ balance sheets, performance, and people can change materially while regulatory applications are being processed. All risks, including … Read more
Recent advances in financial technology (FinTech) have dramatically transformed the financial landscape with respect to the way we access, invest, and transfer financial capital. In our recent article, we explore a promising avenue for the use of natural-language processing in an effective yet non-invasive method by which to monitor the health and integrity of financial institutions and corporations in general.
Specifically, the continuous flow and abundance of corporate emails makes them a far more prevalent and timely indicator of escalating risk or malaise than the numbers in quarterly financial statements. However, difficulties lie in systematically and efficiently drawing inferences from … Read more
On January 22, 2016, the Delaware Court of Chancery signaled the demise of “disclosure-only” settlements in M&A stockholder lawsuits with its decision in In re Trulia, Inc. Stockholder Litigation. Arguing that the “optimal means by which disclosure claims in deal litigation” should be through adjudication rather than the settlement process, the Chancery Court cautioned that it would “continue to be increasingly vigilant in applying its independent judgment to its case-by-case assessment of the reasonableness of the ‘give’ and ‘get’” of disclosure-only settlements. The Chancery Court offered its “hope and trust that [its] sister courts will reach the same … Read more
Earnings management is the use of managerial discretion to apply accounting standards or construct business transactions in a way that alters reports on the financial health of an organisation . Earnings management can include both legitimate and illegitimate methods “to smooth earnings over accounting periods or to achieve a forecasted result.”  For example, in periods of good financial performance, managers may increase provisions for bad debts or for obsolete inventory to create reserves for future use. Alternatively, in periods of poor financial performance, managers may reduce or reverse those provisions to inflate reported earnings. Similarly, managers might also construct … Read more
On January 26 the Basel Committee on Banking Supervision (BCBS) released its first set of Frequently Asked Questions (FAQs) on the Fundamental Review of the Trading Book (FRTB). The BCBS published the FRTB in January 2016 with the intent to harmonize (i.e., reduce variability) the treatment of market risk across national jurisdictions. It will generally result in higher global capital requirements.
The BCBS calls for each jurisdiction to finalize implementation of the FRTB before January 2019 and for compliance to begin by December 2019. We do not expect US regulators to adopt the standard until 2018 at the earliest … Read more
One of the most elegant legal innovations to emerge from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is the FDIC’s Single Point of Entry (SPOE) initiative, whereby regulatory authorities will be in a position to resolve the failure of large financial conglomerates (corporate groups with regulated financial entities as subsidiaries) by seizing a top-tier holding company, down-streaming holding company resources to distressed subsidiaries, wiping out holding company shareholders while simultaneously imposing additional losses on holding company creditors, and allowing the government to resolve the entire group without disrupting business operations of operating subsidiaries (even those operating … Read more
The U.S. capital markets experienced continued volatility throughout much of 2016, as the bond and equity markets were affected by a series of significant events: the November U.S. presidential election; the June Brexit vote; fluctuating oil prices over the course of the year; the Federal Reserve’s December increase in interest rates, only the second since 2006; and a variety of geopolitical events throughout the year, most notably with respect to China and Russia.
How the U.S. capital markets perform in 2017 will largely depend on how and whether the Trump administration implements its proposals, and how those policies complement or … Read more
Hedge funds have boosted shareholder activism worldwide. In my recent article, I discuss the policy response to hedge fund activism. I argue that the short-termism debate cannot shed light on the desirability of such activism. Rather, hedge fund activism should be regarded as a conflict of entrepreneurship, namely a conflict about the most efficient horizon to maximize profit. The choice of this horizon, which is uncertain, belongs to the entrepreneur. An engagement by hedge funds reveals that their views about this particular point differ from that of the incumbent management. Because the efficient horizon to maximize profit varies with the … Read more
On January 19, 2017, the U.S. Commodity Futures Trading Commission (“CFTC“) issued an Enforcement Advisory describing the factors that will be considered to evaluate the cooperation provided by companies that are the subject of CFTC investigations and / or enforcement actions (the “Cooperation Advisory”). The CFTC can, in its discretion, reduce penalties to be imposed for violations based upon its determination of a company’s level of cooperation. The Cooperation Advisory emphasizes a company’s proactive steps in response to an investigation, including encouraging personnel to cooperate with CFTC, identifying potential wrongdoers from within the company and from other organizations, … Read more
It was predictable. Given a solidly Republican Congress and a Republican president, sooner or later, an effort would be made in the Trump administration to curb class actions. Not surprisingly, it has come sooner, with the “Fairness in Class Action Litigation Act of 2017” (H.R. 985). A motley assortment of procedural “reforms”—some good, many bad, and most overbroad—H.R. 985 has been introduced by Representative Bob Goodlatte (R-Va.), chairman of the House Judiciary Committee. Much of this bill is a reincarnation of a similar class action “reform” bill that passed the House in 2015, but died in the Senate (possibly because … Read more
The House Republicans have proposed sweeping changes to the U.S. tax system, specifically that income from the export of goods, services and intangibles will not be subject to federal income tax, and that the cost of such imports into the U.S. will not be deductible. By incentivising exports and deterring imports, the proposed “Border Adjustment Tax” (BAT) is intended to increase domestic production, strengthen the U.S. economy and create new jobs, and deter corporate inversions and erosion of the U.S. tax base. It also is estimated to pay for approximately one-third of the cost of the Republicans’ comprehensive tax reform … Read more
President Donald J. Trump’s “America’s Infrastructure First” plan is one of the Trump Administration’s priorities during his first 100 days in office. Throughout the campaign, President Trump heralded his plan to build and restore highways, tunnels, airports, bridges, and water systems across America and promised a $1 trillion investment in the infrastructure sector over a 10-year period. Leaders from both parties acknowledge the nation’s deteriorating infrastructure, and there have been expressions of support from both sides of the aisle for some sort of development and construction program. Aside from the overall proposed sticker price of $1 trillion, there are scant … Read more
M&A activity in January 2017 showed mixed results, with the global M&A market generally down and the U.S. M&A market generally up. Total deal volume as measured by dollar value decreased globally by 26.9% to $280.97 billion, but increased in the U.S. by 36.0% to $108.11 billion. The number of deals followed similar trends, decreasing globally by 0.4% to 2,832 and increasing in the U.S. by 21.6% to 789.
Globally, both strategic and sponsor-related M&A activities were down, with deal volume, as measured by dollar value, decreasing by 22.4% to $235.77 billion and 43.9% to $45.20 billion, respectively. The number … Read more
Swaps transactions, virtually unregulated before the 2008 financial crisis, are regulated in the U.S. under Title VII of the Dodd-Frank Act. Title VII empowers the Commodity Futures Trading Commission (CFTC), for most swaps, and the Securities and Exchange Commission, for the balance of swaps (securities-based swaps), to adopt a comprehensive regulatory framework. Many other G-20 countries have added similar responsibilities for financial regulators given the role swaps played in the financial crisis.
The CFTC now is being run by Acting Chairman J. Christopher Giancarlo. He is the lone Republican CFTC commissioner and recently criticized many, but not all, of the … Read more
On February 3, 2017, the U.S. Federal Trade Commission (FTC or Commission) released the findings of its “Merger Remedy Study” (the FTC Study) which examined the effectiveness of Commission-required remedies in transactions from 2006 to 2012. The FTC Study—its first on merger remedies in over 16 years—provides an important window into the FTC’s current thinking about merger remedies that may help businesses plan and position transactions for FTC approval. Moreover, it also provides several key insights that potential divestiture buyers should consider during and after completion of the divestiture to ensure the remedy is successful.
The FTC Study concluded … Read more