Prior research has documented the existence of disclosure externalities, or information spillovers, between firms in a number of different settings. The idea is that when two firms are economically related, public disclosures by one firm can affect the stock price of the other firm. In a recent paper, we extend this idea by asking whether firms make disclosure decisions with the intention of affecting other firms’ stock prices. That is, we examine whether the presence of information spillovers influences firms’ disclosure decisions.
We investigate our question in the context of cash-based mergers and acquisitions. We test whether bidders disclose information … Read more
It is received wisdom that institutional investors have insufficient incentives to cast informed votes because they compete on relative performance. If BlackRock invests in the monitoring of one of its portfolio companies, it will become relatively less competitive vis-à-vis the other institutional investors that hold shares in that company. In fact, other institutions would reap roughly the same benefits as BlackRock from its monitoring effort, without incurring any cost. Yet, there is evidence that institutional investors, whether actively or passively managed, no longer rubberstamp any proposal managers put to a vote. While that is not, in itself, evidence that institutional … Read more
On April 20, 2018, the Court of Appeals for the Ninth Circuit held in Varjabedian v. Emulex Corp. that a violation of Section 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(e) (Exchange Act), which governs tender offers, requires a showing of negligence, not scienter. In so holding, the Ninth Circuit departs from five other Circuit Courts—the Second, Third, Fifth, Sixth, and Eleventh Circuits—that have held that Section 14(e) claims require proof of scienter (the intent to defraud).
In February 2015, Emulex Corp. (Emulex) and Avago Technologies Wireless Manufacturing, Inc. (Avago) announced that they had … Read more
It’s not every day that Italian capitalism can be heralded as a bastion of transparency. But the showdown on May 4 at Telecom Italia’s board meeting between U.S. activist fund Elliott Management and French conglomerate Groupe Bolloré proved to be one such opportunity.
That is because in Italy, unlike in the United States and other advanced economies, shareholder votes are part of the public record. As such, the vote in Milan was the perfect arena to observe some of the most important fault lines in shareholder capitalism today.
Ultimately, the case turned on the votes of large passive institutional investors, … Read more
On April 27, 2018, the Securities Industry and Financial Markets Association (“SIFMA”), the leading industry group representing broker-dealers, banks and asset managers, along with other securities industry related groups, released a report called “Expanding the On-Ramp: Recommendations to Help More Companies Go and Stay Public” (the “Report”). In response to the decline in the number of IPOs and the number of public companies generally in the United States over the last twenty years, the Report provides recommendations aimed at reducing perceived impediments to becoming and remaining a public company.
As the Report notes, the United States is now home … Read more
For decades, corporate law played a pivotal role in regulating corporations across the United States. Consequently, Delaware, the leading state of incorporation, and its courts played a central part in corporate law and governance. More than half of publicly traded firms are incorporated in Delaware, and in many law schools in the United States, Delaware corporate law has become virtually synonymous with American corporate law. While some experts have praised Delaware courts for their efficiency and sophistication in adjudicating corporate disputes, and others have accused the Delaware courts of pro-management leanings, very few would dispute that Delaware courts have played … Read more
On March 16, 2018, the Center for Audit Quality (the “CAQ”) published Non-GAAP Financial Measures: A Roadmap for Audit Committees (the “Roadmap”) to provide guidance to audit committees on advancing their oversight and involvement with non-GAAP financial measures. The Roadmap summarizes the common themes on the presentation and use of non-GAAP financial measures that emerged from a series of roundtable discussions held by the CAQ in 2017 and attended by a variety of stakeholders, including audit committee members, management, investors, securities lawyers and public company auditors. The CAQ hopes that the Roadmap will prove useful for audit committees and … Read more
Once a legal unknown, Michael Cohen made it last week to the front pages of both the New York Times and the Wall Street Journal. Charges swirl around him as the personal fixer for President Trump and the alleged bagman for the payment of hush money by Trump to porn star Stormy Daniels. Daniels’ attorney, Michael Avenatti, has accused Cohen of violating the federal bank fraud statute, and the Department of Justice has identified Cohen as the subject of a criminal investigation.
This brief column will not attempt to evaluate Cohen’s criminal liability (if any), but it will offer … Read more
I am very happy to be with you in Manhattan. You may have heard that I have been kind of busy in Washington.
After I speak with you this morning, I need to head across Times Square to participate in the annual conference about the Foreign Corrupt Practices Act.
I did not intend to deliver two speeches about white collar crime today. When I received the invitations a few months ago, I hoped to delegate one of them to a Senate-confirmed Assistant Attorney General for the Justice Department’s Criminal Division.
The President nominated a highly qualified lawyer named Brian Benczkowski … Read more
On May 3, the Second Circuit vacated on evidentiary grounds Jesse Litvak’s conviction – after a second trial – on a single count of securities fraud related to trades of residential mortgage backed securities (“RMBS”) and remanded the case to the United States District Court for the District of Connecticut. This ruling is the latest setback for the government, as the Second Circuit in 2015 had vacated Litvak’s prior conviction on ten counts of securities fraud, one count of fraud against the Troubled Asset Relief Program (“TARP”), and four counts of making false statements to the government, following his … Read more
Much has been written about the Securities and Exchange Commission’s enforcement action involving Yahoo’s failure to adequately disclose a cyberbreach. I am writing about something that the SEC’s announcement and order did not address and therefore has not been written about.
On April 24, 2018, the SEC announced a settlement with Altaba Inc., formerly Yahoo! Inc., under which Altaba agreed to pay $35 million and take certain remedial actions to resolve claims that Yahoo violated federal securities law by waiting until September 2016 to make disclosures about a 2014 data breach of its user database. The SEC’s announcement … Read more
I’m delighted to be here today among so many friends and colleagues, and I extend my thanks to the New York City Bar for hosting this important event. Because New York plays such a pivotal role in our financial system, members of the New York City Bar have long taken a leading role in many of the most significant securities and white collar matters. And the City Bar has been a key forum for education and dialogue about these important issues. I am honored to join today’s distinguished group of speakers, panelists, and attendees.
This afternoon, I would like to … Read more
Closing opinions are letters that attorneys issue for the benefit of parties to a transaction. With these letters, attorneys attest on behalf of their clients to the enforceability and legal status of deals. These letters can reduce information asymmetries and can function as a type of deal insurance.
That said, descriptions of what lawyers actually do when they issue closing opinions turn out to be deceptively complex. As a consequence, the questions of what lawyers should do, or what they could do, when they issue closing opinions can fall out of focus.
Deal lawyers should consider new ways in which … Read more
Largely because of the U.S. Supreme Court’s 1975 decision in Withrow v. Larkin, the accepted view for decades has been that a federal administrative agency does not violate the Due Process Clause by combining the functions of investigating, charging, and then resolving allegations that a person violated the law. Many federal agencies have this structure, such as the Securities and Exchange Commission and the Federal Trade Commission.
In 2016, the Supreme Court decided Williams v. Pennsylvania, a judicial disqualification case that, without addressing administrative agencies, nonetheless raises a substantial question about one aspect of the combination of functions … Read more
With shareholder proposals regarding ESG and sustainability matters becoming the most common kind of proposal, proxy advisory firm ISS marketing a new “Environmental & Social QualityScore” product for rating public companies, asset managers developing ESG-related guidelines and voting policies, and significant activist and investor fundraising efforts underway with ESG-linked themes, the U.S. Department of Labor (the “DOL”) has issued new guidance that may influence the going-forward behavior of some market participants.
On April 23, 2018, the DOL issued Field Assistance Bulletin No. 2018-01, clarifying previous DOL guidance for ERISA-covered private-sector employee benefit plans regarding proxy voting, shareholder engagement, and … Read more
Private meetings between management and investors (site visits) occur worldwide and are generally held at corporate headquarters with invited investors and sell-side analysts. Ng and Troianovski (WSJ, 2015) report that U.S. investors spend $1.4 billion a year for face time with executives. In-house meetings differ from other management-investor interactions such as investor conferences and analyst or investor days in that they are generally not publicized in advance and their content may never become public unless hosting firms are required to publish the meeting details by regulation. While private meetings between investors and corporate management are common in the U.S., these … Read more
New Risk of Below-Deal-Price in Appraisal Results
Last quarter, the Delaware courts issued the first post-Dell appraisal decisions—Aruba and AOL (issued by the Court of Chancery) and SWS Group (issued by the Delaware Supreme Court, affirming the Court of Chancery decision below). In Dell, the Supreme Court had held that, in the case of an arm’s-length merger with a “robust” sale process, the deal price is generally the best “proxy” for appraised fair value and should be given “heavy, if not determinative weight” in determining fair value. The Supreme Court had also directed that, even if the … Read more
In a recent post on this blog, I described how IOSCO’s Multilateral Memorandum of Understanding (MMoU)—an arrangement intended to facilitate cooperation among regulators—improved cross-border enforcement of securities laws. In this post, I summarize a follow-up study showing that this enhanced enforcement significantly increased capital market liquidity by roughly 7 to 13 percent for domestic shares unaffiliated with foreign markets. The study also shows an even greater improvement for shares listed on markets outside an issuer’s home country. Cross-border enforcement is most important in these situations that involve multiple markets, regulators, and jurisdictions, and so it is not surprising that such … Read more
Evidence about the relative importance of private and public enforcement of securities laws for financial markets is inconclusive. The recently introduced Market Abuse Directive (MAD) (2003/6/EC) sets a European Union (EU) standard for regulation of insider dealing and market manipulation. Under Article 18 of the MAD, EU member states had to implement by October 12, 2004, local regulations that require the disclosure of corporate insider trading. The regulation represents a unique natural experiment that was introduced not in response to a specific case but as a mandate (exogenously) to EU countries (and Switzerland) simultaneously. This experiment allows us to examine … Read more
It is wonderful to be in Philadelphia.
It is wonderful to be at Temple University. It is very kind of Temple to host this event. I will speak for about 30 minutes and then take questions.
Before I move to today’s topic — the relationship between Main Street investors and investment professionals — I ask for your indulgence because I want to elaborate on Pennsylvania, Philadelphia and Temple University.
Pennsylvania is my home state. My brothers and I were fortunate to experience much of the best of Pennsylvania growing up. Through the sixth grade, we lived in what … Read more
In mergers and acquisitions (M&A), one of the trickiest tasks is assessing the value of the company to be purchased or sold. While in some cases buyers and sellers come easily to an agreement, in others the information asymmetry between the two parties is too great or the target company is too opaque, and the deal can fall apart.
Earnouts are contractual agreements that link part of the acquisition price to the future performance of the target. One portion of the price is paid to the selling shareholders up front and the remaining portion is paid only if the target … Read more
I am going to touch on two areas of work that reflect our efforts to be a responsive regulator that seeks engagement from all as we develop regulatory policies: the standards of conduct for investment professionals and liquidity risk management.
Before I dive in, let me pause for the disclaimer. I am speaking today only for myself and not for the Commission, the Commissioners or the staff.
Standards of Conduct for Investment Professionals
The Commission recently proposed for public comment a significant rulemaking package on the standards of conduct for investment professionals. The proposals are intended to serve … Read more
Last year, when the Supreme Court revisited the topic of insider trading in Salman v. United States, scholars rehearsed a familiar debate: Should Congress enact a statute that explicitly defines insider trading? Or should it stick with the status quo, wherein the Court periodically clarifies previous holdings in cases such as Dirks, Chiarella, and O’Hagan? Defenders of the status quo argue that a statutory definition would simply encourage traders to find—and leap through—legal loopholes. Critics respond just as robustly that statutory language provides notice and restrains prosecutorial overreach.
In Insider Trading’s Legality Problem, I explore an additional … Read more
On April 24, the Securities and Exchange Commission charged Altaba Inc., formerly Yahoo! Inc., with misleading shareholders by waiting almost two years to disclose its 2014 data breach. Consenting to a cease-and-desist order, Altaba agreed to pay a $35 million penalty in the first SEC enforcement action against a public company relating to cyberbreach notification. The SEC’s action follows a trend by state attorneys general and other regulators in exacting significant penalties from companies that fail to provide timely breach notification. Yahoo! previously reached an $80 million settlement to resolve a class-action securities case for failure to disclose the … Read more
Close to 40 percent of all companies listed on major U.S. stock exchanges have been targeted by a securities class action lawsuit at least once between 1996 and 2017, according to the Stanford Securities Class Action Clearinghouse. These lawsuits are not only common but increasingly popular, with a record number of cases filed in the past two years. Given their prevalence, understanding the economic implications of the current securities litigation system is important.
Securities class action lawsuits can be socially beneficial if they deter wrongdoing, curb managerial rent extraction, and compensate injured shareholders. However, class actions have a widely discussed … Read more
If there was ever a regulatory grace period for virtual currencies and blockchain technology, it is officially over. Five federal regulators—The Financial Crimes Enforcement Network of the US Treasury Department (FinCEN), the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Internal Revenue Service (IRS) and the Office of Foreign Assets Control (OFAC)— all recently issued statements or took actions in which they clarified their positions on the scope of their jurisdiction over multiple aspects of virtual currency and certain types of blockchain enterprises. State, foreign and multilateral regulators have also taken actions to rein in virtual … Read more
The Cayman Islands, Bermuda, and the British Virgin Islands are famous as “tax havens” that facilitate the evasion or avoidance of domestic tax. They and a growing number of other offshore jurisdictions in the Caribbean and elsewhere are emerging hubs of modern financial transactions. While offshore jurisdictions tend to attract foreign capital with low tax rates, they may be doing much more than shortchanging the Internal Revenue Service.
In my article, “Regulating Offshore Finance,” I explore how offshore incorporation can enable commercial entities to evade federal regulatory statutes. The applicability of federal statutes and where a commercial entity chooses to … Read more
The Corporate Council of the Corporation Law Section of the Delaware State Bar Association (the “Corporate Council”) has released proposed legislation to amend certain provisions of the Delaware General Corporation Law (“DGCL”) which if enacted would, among other things, (i) amend Section 262 to reduce the number of transactions that would be subject to appraisal claims by extending the “market out exception” to the availability of statutory appraisal rights in exchange offers followed by a merger under Section 251(h), (ii) amend Section 204 to clarify the situations in which that Section may be used to ratify defective corporate acts … Read more
Bitcoin is a currency, technology, and, most recently, futures product. Several clearinghouses have allowed bitcoin futures trading. For example, CBOE launched trading in bitcoin futures on December 10, 2017, while CME Group did so a week later. NASDAQ and Cantor Fitzgerald’s exchange are also considering offering bitcoin futures.
Futures generally contribute to systemic risk, but distinctive features of bitcoin futures heighten concerns. Thus, the Futures Industry Association (FIA), a trade organization representing major banks and brokers, has protested the introduction of bitcoin futures to the market without more scrutiny, given their enormous potential to disrupt the economy. This … Read more
It’s a real honor to be here with you today at the Greater Cleveland Middle Market Forum.* In addition to leading some of the nation’s most promising young companies, you all have done exceptional work making sure that the middle market gets the attention it deserves in Washington. And as a lifelong baseball fan, I couldn’t miss the chance to see the Indians show the Cubs who’s boss tonight in Cleveland.
Now, before I begin, let me just give the standard disclaimer: the views I express here are my own and do not reflect the views of the … Read more
Investments in private equity are typically structured as 10 year limited partnerships in which fund managers act as general partners (GPs) and investors act as limited partners (LPs). Since the fund life is broken down into an investment and a liquidation period, GPs can only make new investments after the investment period has expired by raising a new fund. At that time, existing investments are not necessarily liquidated, so that current fund returns rely heavily on subjective performance estimates of their investments. This fact, stemming from a market setting of information asymmetries, has led many investors, industry observers, and academics … Read more
In a March 15, 2018 decision in Chamber of Commerce of the United States v. United States Department of Labor, the United States Court of Appeals for the Fifth Circuit vacated in its entirety the so-called “Fiduciary Rule” promulgated by the Department of Labor (“DOL”) in 2016, holding that the rule is inconsistent with the Employee Retirement Income Security Act (“ERISA”) and that the DOL lacked statutory authority to impose the restrictions and requirements the rule created. Two days earlier, in Market Synergy Group, Inc. v. United States Department of Labor, the United States Court of Appeals … Read more
In 2010, Roger Carr, then-chairman of British confectionery Cadbury, waged a grueling five-month battle before losing control of the company to Kraft Foods. “At the end of the day,” he said, “there were simply not enough shareholders prepared to take a long-term view of Cadbury and prepared to forgo short-term gain for longer-term prosperity.”
In response to the deal, the Guardian newspaper asked whether it was time to regulate hedge funds’ activities to protect premier UK companies from inefficient takeover bids. Hedge funds held 5 percent of Cadbury at the time of Kraft’s bid, and, according to Roger Carr, short-term … Read more
Crypto trading platforms worldwide should be aware of recent SEC actions if they provide access to US persons or persons within the US for trading.
Global financial regulatory authorities have begun to take action and release guidance regarding the emerging cryptocurrency markets, including the sale and trading of tokens, coins, or other digital or crypto assets. Some regulatory authorities, such as those in the United Kingdom, Germany, Switzerland, Hong Kong, and Singapore, have issued statements or guidance to alert market participants that digital or crypto assets may be qualified as regulated financial instruments (for example, securities) and must comply with … Read more
As Toys ‘R’ Us heads for liquidation, a common refrain has it that the toy retailer failed to successfully reorganize in Chapter 11 because it took on too much debt. The 2005 leveraged buyout (LBO) of Toys ‘R’ Us by a group of investors led by KKR Group, Bain Capital, and Vornado Realty Trust is a particular target for blame. But this ignores the larger issue, of which the LBO and the subsequent bankruptcy are merely symptoms. In short, Toys ‘R’ Us collapsed, like many companies have, because of a failure to innovate.
Unmanageable debt and capital structures – though … Read more
Zohar Goshen, Kathryn Judge, and Eric Talley were among the authors of three of the 10 best corporate and securities articles last year, the Corporate Practice Commentator has announced. The Columbia Law School professors were joined by Gabriel Rauterberg, a professor at the University of Michigan Law School and former research scholar at Columbia Law School.
The Corporate Practice Commentator’s Robert Thompson, a professor at Georgetown Law School, conducted the 24th annual poll to compile the top-10 list. Teachers of corporate and securities law voted to select the best of more than 565 articles.
All 10 articles, listed in … Read more
Corporate bankruptcy law is built around the idea of replicating the hypothetical bargain that would occur among creditors of a firm if they could all negotiate ex ante. By the common account, the creditors in that bargain would agree on a set of rules that maximize value. In our working paper, “The Bankruptcy Partition,” we introduce an important qualification to this idea. When investors gather to invest in a common venture, their focus is on maximizing the value of that particular venture, rather than maximizing their total wealth as a group. The focus of the hypothetical creditors’ bargain, then, is … Read more
M&A activity gained momentum in March 2018, capping the strongest opening quarter in the history of this publication. In the U.S., deal volume returned to January levels, increasing by 109.6% to $174.10 billion, and the number of deals increased by 2.9% to 751. Globally, deal volume increased by 49.9% to $446.00 billion, and the number of deals increased by 4.0% to 2,838. As described below, the one notable exception to the overall trend was a decrease in sponsor-related deal volume.
Strategic vs. Sponsor Activity
The increases in deal volume were reflective of a strong month for strategic transactions. In the … Read more
The U.S. banking industry has exhibited increasing vulnerability to economic cycles since the easing of post-depression era measures designed to insulate banking from economic instability. Between 1934 and 2017 there were 2,758 commercial and savings bank failures. Nearly 80 percent of all post-depression bank failures occurred after the deregulatory period started in 1980. The histories of the 1980s, early 1990s, and 2007 – 2009 U.S. banking crises are similar. The crises followed similar patterns in which a period of economic growth included increased risk-taking by banks, manifested through asset-based lending to volatile markets, energy and real estate in particular. … Read more
On April 3, 2018, the U.S. Treasury Department issued a report detailing a number of recommendations for reforming and modernizing the Community Reinvestment Act of 1977 (“CRA”) framework. The report, which follows through on the commitment made by Treasury in its June 2017 report to the President to review the current CRA framework, includes recommendations for (i) changing the way CRA geographic assessment areas are defined to reflect the changing nature of banking arising from changing technology, customer behavior, and other factors; (ii) improving the CRA performance evaluation criteria to increase the transparency and effectiveness of CRA rating determinations; (iii) … Read more
In 2013, Michael Dell and his private equity partner, Silver Lake, brought the previously publicly-held Dell Corporation private at a price of $13.75 per share, a price that was approved by Dell’s board and by a 57 percent majority vote of shareholders (70 percent of shares voted) on September 12. 2013. That price was arrived at after the board examined numerous estimates of the value of Dell by various outside experts and after an extensive, but ultimately unsuccessful, “go shop” canvassing of at least 60 other companies to explore their interest in making a higher offer.
Shareholders dissenting from the … Read more
On April 3, 2018, the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) issued long-awaited frequently asked questions (“FAQs”) regarding its new customer due diligence requirements (“CDD Rule”) that become effective on May 11, 2018.1 As a reminder, on May 11, 2018, the CDD Rule will require covered financial institutions (1) to establish procedures to identify and verify the identity of the beneficial owners of legal entity customers that open new accounts unless an exception applies and (2) ensure their anti-money laundering (“AML”) compliance programs include appropriate risk-based procedures for ongoing CDD efforts, including developing customer risk profiles and periodically … Read more