Managerial entrenchment is detrimental to shareholder value (Faleye (2007), Cohen and Wang (2013), and Cohen and Wang (2017)). Managers are able to become entrenched by making specific investments whose value is higher under their watch than under that of the next-best alternative managers (Shleifer and Vishny (1989)). This value differential will be lost if shareholders replace managers who entered into such deals. As a result, those managers gain leeway to increase their compensation and exercise more discretion over firm strategy in a way that might destroy shareholder value.
In a recent article, we explore how managers who are not yet … Read more
The Blue Sky Blog has never before run eulogies, but Chancellor William Allen is a special case. Whether one evaluates him in terms of his historical significance, his unique craftsmanship as a judge, or his personal character and the courage he has shown in the face of adversity, he has few equals. He bridged an important transition during which Delaware’s jurisprudence went from being viewed skeptically as predictably pro-management to the current era in which Delaware decisions receive the same close and respectful attention as might be given to a U.S. Supreme Court decision. Chancellor Allen was not alone in … Read more
Twenty some years before Bill Allen was appointed Chancellor of Delaware, Bayless Manning, a fine corporate law scholar, announced the death of corporate law “as a field of intellectual effort.” Manning described its focus as “our great empty corporation statutes – towering skyscrapers of rusted girders, internally welded together and containing nothing but wind.” When Bill became Chancellor in 1985, that wind had become a hurricane and the skyscraper was indeed empty. The standard duality of corporate law – business judgment or entire fairness – simply could not hold up to the storm that hostile takeovers produced. Management efforts … Read more
Last weekend the corporate legal community lost one of its finest: former Delaware Chancellor and Professor at New York University School of Law, William T. Allen. For 12 years Bill Allen and I served together as judicial colleagues on the Delaware Court of Chancery. For the two decades thereafter, in his reincarnation as law professor and lawyer, he and I continued our relationship as good personal and professional friends. As a judge and scholar, Bill received during his lifetime countless and well deserved accolades at the highest levels of the judiciary, academia, and the legal profession. To that high praise … Read more
Bill Allen was an extraordinary person – a great judge who recalibrated Delaware fiduciary law at a critical junction in its history; an enthusiastic and enlightening teacher who engaged with students who were not even born when he had already written Time/Warner, Caremark, and Interco; a convivial lunch companion despite his intellectually rigorous approach to law and life; a person of rock-ribbed integrity but also compassion; and, certainly not least, a loving and well-loved husband and father. And he was a true stoic – achieving all this while dealing with difficult medical issues. His courage extended to never … Read more
While exempt offerings now involve twice as much money as public offerings, only accredited investors (“AIs”) get invited to the private company party. Thus, individuals who fail to meet the net worth or income thresholds (“non-AIs”) cannot invest early in high-growth ventures and therefore miss out on a lot of investments and upside. Moreover, because non-AIs make up 87 percent of U.S. households, new and other privately held businesses are not raising capital from a vast majority of society’s individuals. To these people and firms, well-intentioned rules are keeping the capital out of capitalism.
Expanding the AI definition would increase … Read more
Many law enforcement agencies reduce punishments for corporations that report their own offenses. My research shows that these self-reporting schemes may help deter crime within a certain range of leniency. But the level of leniency has a U-shaped relationship with the level of deterrence: As the severity of punishment decreases, the probability that a crime will occur ﬁrst decreases and then increases.
Direct and Indirect Punishments of Executives
The United States, the United Kingdom and other countries have strengthened corporate self-reporting programs to help them detect non-antitrust offenses such as securities fraud and foreign bribery as well as antitrust violations. … Read more
Disclosure of financial reporting errors is vital to maintaining investors’ trust in the capital markets. Yet, in recent years the number of misstatements corrected in restatements of financial reports has declined dramatically, and misstatements are now more likely to be corrected in less formal revisions of those reports. Based on materiality guidance, prior years’ financial statements of firms with material misstatements are required to be restated on an 8-K filing. In contrast, revisions, sometimes referred to as “little r” restatements, are considered to be immaterial to prior period financial statements and do not require an 8-K filing. In view … Read more
Companies that face non-public government investigations frequently confront challenging questions regarding whether and when to disclose the existence of the investigation, how much to disclose, and any duty to update the disclosure as the investigation proceeds. On the one hand, regulatory investigations are generally confidential and it is axiomatic that the existence of an investigation does not reflect a conclusion of wrongdoing. The premature disclosure of what may turn out to be a baseless investigation (perhaps instigated by a person with a grudge or self-interest) can needlessly cause internal disruption, complicate an internal investigation, unnecessarily alarm current shareholders, and – … Read more
The Securities and Exchange Commission requested public comment on ways to simplify, improve, or harmonize exemptions from the requirement to register securities offerings. The SEC acknowledged that the current array of exempt offerings is complex and might be difficult for issuers to navigate. See Concept Release on Harmonization of Securities Offering Exemptions, 84 Fed. Reg. 30,460 (June 26, 2019).
My comment proposed a new exemption from the registration requirements to replace several of the current exemptions and simplify access to capital for startup companies and small to mid-sized companies. It would combine features from Rules 506(b) and (c) of Regulation … Read more
On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA), which is the largest gross tax cut in American history (cutting more than $5.5 trillion in taxes over 10 years); the act took effect on January 1, 2018. The TCJA has two key elements: (i) a reduction in the corporate income tax rate from 35 percent to 21 percent, and (ii) a one-time tax holiday that cuts the tax on cash repatriation from foreign subsidiaries from 35 percent to 15.5 percent. Furthermore, in connection with (ii), the U.S. corporate tax system also moved from a worldwide … Read more
On September 25, 2019, the US House of Representatives (“House”) passed, by a vote of 321 to 103, the Secure and Fair Enforcement Banking Act (“SAFE Banking Act”), bipartisan legislation designed to secure and regulate banking services to the expanding cannabis market in the United States. The SAFE Banking Act would bar federal regulators and prosecutors from penalizing banks and credit unions for providing core banking services to cannabis-related businesses (“CRBs”) and ancillary businesses authorized under state law. As the first standalone cannabis reform bill to pass either chamber of Congress, its passage in the House represents a major step … Read more
The rise and fall of The We Company IPO bubble is one of those events that, like the subprime mortgage bubble that preceded the financial crisis, calls for an examination of market structures that could have produced such a precipitous turnabout. Indeed, the two bubbles share similar features, namely, structural features that favor the expression of positive sentiments and make it difficult to express negative sentiments. We call this “one-sided market sentiment.”
Some of the most famous moments of the financial crisis, memorialized in print and film, turned on how intrepid traders determined that impenetrably complex mortgage-backed securities were overvalued … Read more
Benchmark Capital partner and legendary tech investor Bill Gurley recently declared on CNBC, “It took me two decades to figure this out, but I think Silicon Valley’s been on the bad end of a bad joke for about four decades now, in terms of the way the traditional IPO process works.” He and others believe that direct listings, like the ones recently completed by Spotify and Slack, are friendlier to issuers.
The core of Gurley’s concern is that the traditional IPO process yields unfavorable pricing outcomes for issuers. On average since 1980, the stock price of IPO firms has popped … Read more
Faced with pressures from varied constituencies, compensation committees striving to demonstrate links between pay and performance regularly consider market-based performance measures such as relative total shareholder return (RTSR). Companies reviewing the mix and designs of their long-term incentives (or being pressured into adopting performance-vested awards) may not be comfortable setting reasonable three-year goals—ones that are not a sure bet, but also not unattainable. As compensation committees and management teams review their alternatives, the use of RTSR as a performance metric is typically part of the conversation. Some compensation committees feel a discussion of long-term incentive metrics is remiss without … Read more
The dramatic implosion of the IPO of The We Company, parent of office-sharing firm WeWork, (the “WeWork IPO) has attracted intense scrutiny across the business community. For scholars and practitioners who work at the intersection of law, business, and technology, the sequence of events leading to that implosion raises fascinating and interrelated questions involving corporate governance, the relationship between public markets and private markets, and platform economics.
Is corporate governance going downhill?
One of the most actively discussed topics in corporate governance is the increased use of multi-class stock structures in IPOs, especially in the case of firms in digital … Read more
A no-deal Brexit would have significant and immediate effects on UK competition law enforcement:
- Parallel investigation of mergers, cartels, and dominance cases by the UK Competition and Markets Authority (“CMA”) and European Commission (“EC”);
- Possible delay to transactions notified to the EC but not cleared by Brexit day;
- A significant increase in the CMA’s caseload, stretching its resources;
- New challenges for claimants bringing EU follow-on damages cases in the UK courts.
If the UK leaves the EU on 31 October 2019 without a withdrawal agreement, it will affect how UK and EU competition law applies to businesses with UK activities.… Read more
Theoretical and empirical research on shareholder voting has provided many exciting insights and guidance for debates on policy and regulation. The default assumption, though, is that shareholders have strong incentives to vote for alternatives that they think are best for the firm. In our paper, available here, we show that, when shareholders have the opportunity to buy or sell shares after voting, there can be strong incentives to vote against the firm’s interest. The presence of this incentive confounds the potential for shareholder voting to aggregate information and serve as a check on management.
We develop a game-theoretic model … Read more
How direct is the link between corporate culture and a corporation’s fortunes? A founder of five successful tech companies recently offered a clue when asked about what he would do differently as a founder and CEO:
“Many things, but I guess one thing that comes to mind is to realize earlier the importance of culture. I discovered this through a spectacular hiring miss at my first company. The company was scaling up and getting its first real growth. I had previously been able to hire people informally. But for this hire, we did a nationwide search, and after interviewing 30 … Read more
In recent years, the study of fiduciary law has undergone a paradigm shift. Rather than treat fiduciary principles as subsidiary elements of various fields of law, such as trust law or corporate law, a burgeoning group of scholars has undertaken to study fiduciary law as a coherent, general field of study that encompasses aspects of private and public law. Case law and academic commentary have progressed to the point that it is now possible to generate a detailed mapping of the field.
In this spirit, we are delighted to announce the publication of The Oxford Handbook of Fiduciary Law, … Read more
The U.S. antitrust agencies have struggled for decades to provide comprehensive guidance on the antitrust treatment of so-called vertical mergers—generally, mergers of two companies at different levels of the distribution chain. Recent developments suggest a new effort to articulate the legal and economic bases for the assessment of vertical mergers. While the specifics have not yet been articulated, it is anticipated that the guidance will address theories of unilateral and coordinated harm, the treatment of efficiencies, and the evaluation of whether remedies are sufficient to address competitive harms. It remains to be seen, however, whether these efforts will provide greater … Read more
U.S. public company audits all include a simple step to determine whether an amount is large or significant for their clients, otherwise known as materiality. This decision influences the planning and procedures of the other facets of the audit as well as many judgments by both the auditor and manager about how to interpret misstatements and discrepancies in financial reporting and auditing. In essence, it is the backbone of financial reporting and auditing but kept confidential from investors and often managers (i.e. not publicly disclosed) in the U.S., unlike the UK. We access proprietary data from the Public Company Accounting … Read more
In 2016, hedge fund Och-Ziff Capital Management Group (“Och-Ziff”) entered into one of the largest Foreign Corrupt Practices Act (“FCPA”) resolutions ever: It agreed to pay a total of $412 million to the Department of Justice and the Securities and Exchange Commission; it agreed to a three-year monitor; and its subsidiary, OZ Africa Management GP, LLC (“OZ Africa”), pleaded guilty to conspiring to violate the anti-bribery provisions of the FCPA. A new decision by the U.S. District Court for the Eastern District of New York, however, suggests that this resolution may only be the beginning.
After OZ Africa pleaded guilty, … Read more
In June 2019, the U.S. Securities and Exchange Commission (“SEC” or the “Commission”) issued a Concept Release on the Harmonization of Securities Offering Exemptions (the “Concept Release”), which set forth proposals to expand the ability of retail investors to invest in private, un-registered securities. Elisabeth de Fontenay (Duke Law) and I, joined by 13 other securities law professors, submitted a comment letter on the Concept Release on September 24. Our full letter can be found here. In our letter, we recommend that the commission ask crucial questions before continuing the decades-old trend … Read more
On September 17, 2019, the U.S. Department of the Treasury issued over 300 pages of proposed regulations to implement the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), legislation that expanded the scope of inbound foreign investment subject to review by the Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”). FIRRMA expanded—subject to the promulgation of these implementing regulations—the Committee’s jurisdiction beyond transactions that could result in foreign control of a U.S. business. The Committee’s jurisdiction will now include non-passive but non-controlling investments, direct or indirect, in U.S. businesses involved in specified ways with critical … Read more
The replacement of a CEO is one of the most important responsibilities of corporate boards. The most common theoretical underpinning of CEO replacement is related to CEO ability: The corporate board learns about the ability of its CEO from firm performance and other sources of information. If the board’s assessment of the CEO’s ability falls below, say, the expected ability of a replacement candidate, then the board may dismiss the CEO. More recent studies associate CEO replacement with firms’ strategy changes. The board looks for a new CEO either to change the strategic direction of the firm or to implement … Read more
In general economics, “asymmetric information” refers to information about a transaction in which one party knows more than another party, to the potential benefit of the former at the expense of the latter. An example often occurs when consumers and a business are counter-parties in consumption transactions. Consumers commonly rely on companies to safeguard their personal and company-specific data used in the transaction without explicitly knowing the internal safeguards and standards placed by the data-holding company on their data protection infrastructure (Moore, 2010).
In theory, the risk to corporate reputation and the prospect of breach-related legal judgments and … Read more
On September 16, 2019, the Federal Trade Commission (“FTC”) and the Antitrust Division of the U.S. Department of Justice (“DOJ”) released the agencies’ 41st Annual Hart-Scott-Rodino Report, which summarizes FTC and DOJ actions conducted under the Hart-Scott-Rodino Antitrust Improvements Act (“HSR Act”) during fiscal year 2018, covering October 1, 2017, to September 30, 2018.
Key statistical findings of the report include:
- Increase in HSR filings. The total number of HSR filings increased 2.9% in fiscal year 2018 (2,111 transactions reported) compared to fiscal year 2017 (2,052 transactions reported). The percentage of transactions investigated slightly increased from 13.9 percent in
… Read more
In an extraordinary judgment delivered by Lady Hale, 11 justices of the Supreme Court of the United Kingdom ruled unanimously on September 24 that the suspension – or “prorogation” – of Parliament last month was “unlawful, null and of no effect” . The decision prompts at least two important questions: Does it show the politicization of the UK Supreme Court, and does it mark a turning point in Brexit?
A Brief History. The UK Supreme Court is a relatively new creation, established in 2009 to replace the judicial function of the House of Lords as the nation’s highest appellate court. … Read more
Advances in information technology have revolutionized the dissemination and acquisition of firm-specific information, allowing investors and other stakeholders to quickly assess firm performance and value and monitor management effectively. Our research examines the impact of information technology on the ability of managers to hide and hoard bad news that, when ultimately released, results in a stock price crash. We use the staggered implementation of the Securities and Exchange Commission’s Electronic Data Gathering Analysis and Retrieval System (EDGAR) from 1993 through 1996 as a proxy for advances in information technology. The EDGAR implementation significantly changed public access to required corporate filings, … Read more
A firm has two options when reporting its quarterly and annual earnings: It can report earnings based on generally accepted accounting principles (GAAP), or it can report non-GAAP earnings by excluding (adding) certain expenses that will increase (decrease) its non-GAAP earnings relative to its GAAP earnings. As the rate of non-GAAP reporting has increased, the Securities and Exchange Commission (SEC) has expressed concern that this practice has the potential to mislead investors. In line with this, the academic literature is also mixed when it comes to the usefulness of non-GAAP reporting. In our paper, we further examine firms’ use of … Read more
M&A activity in the U.S. and worldwide weakened in August across almost all indicators. The number of deals fell by 9.5% in the U.S., to 641, and by 21.9% globally, to 2,394. The total value of deals fell by 14.3% in the U.S., to $119.86 billion, and by 21.9% globally, to $259.78 billion. Finally, average deal value decreased by 5.4% in the U.S., to $187.0 million, but stayed flat globally, at $108.5 million. Figure 1.
Strategic vs. Sponsor Activity
Both strategic and sponsor activity generally declined. The number of strategic deals decreased in the U.S. by 7.8% to … Read more
During a four-month span in late 2018, two events occurred at opposite ends of the country that could dramatically reshape the regulation of corporations in America. First, in September 2018, California enacted the nation’s first law mandating board gender diversity for all public corporations that are physically headquartered in California. Second, in December 2018, the Delaware Court of Chancery in Sciabacucchi v. Salzberg ruled that a corporation may not in its governing documents regulate the rights of its shareholders arising under federal securities law. Although seemingly unrelated, I argue in a forthcoming article that both events share at … Read more
Standardization can be a virtue and one that M&A lawyers, likely due to self-interest and ego, sometimes resist. If venture financing and derivatives practices can have widely accepted forms of legal documentation as a starting point, why should M&A be an exception? Ironically, agreements for takeovers of publicly traded companies – once revered as a rarified realm that only an elite group huddled in skyscrapers in Manhattan could navigate – has evolved considerably toward standard forms thanks to enhanced attention to these publicly filed agreements and an effort by Delaware courts to draw clearer guidelines about precisely what will and … Read more
The debate about the purpose of corporations seems to have heated up after Larry Fink’s annual letter to the CEOs of companies in which BlackRock invests and again after the statement from the Business Roundtable. Both Fink’s letter and the Business Roundtable statement referred to global problems and how companies should embrace a greater responsibility to address them. The statement by the Business Roundtable has been perceived variously as a major shift in corporate law or as a PR exercise to prevent government regulation.
Irrespective of its motivations, while an acknowledgement that a consideration of stakeholder interests is useful, an … Read more
Thank you Bob [Stebbins]. It is such a pleasure to be in a university town.
We drove in just after 11pm last night [September 12] and even then you could feel the energy, the energy that comes with curiosity, a thirst for knowledge and a belief that knowledge, know how, effort and community will bring us a better tomorrow.
As we drove down Mission Street this morning — past the same Buffalo Wild Wings where we got a burger late last night — I took in the health center, and other businesses. I then remarked to Bob about the strength … Read more
Stockholder representatives in class and derivative actions are supposed to share in any recovery on the same terms as other stockholders. Absent court approval, class counsel typically cannot share fee awards with their clients. Indeed, class-action litigator William Lerach famously served time in federal prison after pleading guilty to a conspiracy charge related to the payment of kickbacks to class plaintiffs.
Direct payments between class counsel and their clients are the most obvious means of encouraging plaintiffs to bring cases, but there are others. For instance, in a recent federal securities class action involving State Street Bank … Read more
The stakes for responsible corporate stewardship have never been higher.
Corporations today account for a greater proportion of our collective productivity than ever before. Of the 100 largest economies in the world, 71 are corporations, and only 29 are countries. U.S. corporations alone generated profits of $2.3 trillion in 2018 — the highest in history. Reflecting their unprecedented scale, U.S. corporations have been blamed for accelerating environmental degradation and aggravating disparities in income and wealth. Calls for the exercise of corporate social responsibility have become increasingly urgent. Recognizing this urgency, the Business Roundtable last month embraced broad stakeholder governance and … Read more
Many managers receive company stock as compensation and then pledge that stock as collateral for personal loans. The practice is increasingly common, and its potential economic impact is anything but negligible. For example, Larcker and Tayan (2010) document that pledged shares by 982 directors in 2006-2009 averaged 44 percent of the total shares received as compensation. In addition, the damage to firm value from managers’ failure to meet margin calls can be significant, as shown by lenders’ liquidation of pledged shares of Valeant Pharmaceuticals. In November 2015, Goldman Sachs sold more than $100 million of shares pledged by Valeant CEO … Read more
On September 9, 2019, the Internal Revenue Service (“IRS”) released proposed regulations (the “Proposed Regulations”) that, if finalized in their current form, would in many cases dramatically reduce the portion of a company’s net operating loss (“NOL”) carryforward that is available to be used following a so-called ownership change of the company. The Proposed Regulations would be effective for ownership changes occurring after they are finalized.
The Proposed Regulations would make other significant changes potentially applicable to distressed companies. Those aspects of the Proposed Regulations are beyond the scope of this memorandum. To learn … Read more