Investor protection has been an ideal in corporate and securities law ever since the early 20th century, when Berle and Means famously highlighted shareholder vulnerability in modern public corporations. In more recent times, investor protection has been treated as a litmus test for the quality of a jurisdiction’s corporate governance and as having a direct link to capital market structure.
Our recent working paper examines the adequacy of Australian law in protecting public company investors in a particular situation – namely, when they rely to their detriment on inadequate, false, or misleading information released by the company. As our … Read more
In 2011, the commission appointed by Congress to investigate the causes of the financial crisis concluded that “a combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis” (The Financial Crisis Inquiry Report, 2011, p. xix). In particular, the opacity of asset-backed securities (ABS) greatly inhibited the ability of investors and regulators to fully understand the risks held by institutions that owned these products. As part of the post-financial crisis effort to reform the securitization process, the Dodd-Frank Act directed the SEC to “require issuers of asset-backed securities, … Read more
Thank you so much, Scott [Hemphill], for that incredibly kind introduction.* It’s a real honor to be here with you—and to be invited to testify before the Federal Trade Commission (FTC). I share your commitment to making sure our markets are competitive and fair for all Americans. And I’m delighted that the FTC has convened this important conversation about the increasingly concentrated ownership profiles of America’s public companies.
I should begin, of course, with the standard disclaimer: the views I express here are my own and do not reflect the views of the Securities and Exchange Commission, my … Read more
While there is a growing debate in the United States about a shift from public equity markets to private ownership models, Asian stock exchanges are steaming ahead. Last year a record 1,074 companies got listed in the region, and 43 percent of all capital raised through primary equity markets globally went to Asian companies. This is more capital than U.S. and European companies raised combined and more than double the share of the global total raised by Asian companies 20 years ago.
Figure 1. Equity financing raised in primary stock markets
Source: OECD Capital Market Series dataset.
Needless to … Read more
On October 30, 2018, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (collectively, the agencies) jointly invited comment on a proposed regulation that, if adopted, should provide regulatory capital relief for certain derivative exposures. If adopted, the regulation would amend the agencies’ risk-based and leverage capital requirements for banking organizations. The proposal is subject to public comment for 60 days following its publication in the Federal Register.
The proposal would implement a “standardized approach for counterparty credit risk” (SA-CCR) to replace the current exposure methodology … Read more
The New York Attorney General (“NYAG”) recently filed a complaint against ExxonMobil alleging that the company violated the Martin Act, New York State’s securities law, by making material misstatements concerning how it was accounting for the possibility of increasingly stringent climate-change regulations in the future. Exxon publicly projected costs arising from the regulation of carbon emissions that, for OECD countries, would reach $60 per ton of CO2 by 2030 and $80 per ton by 2040, with similar regulations in non-OECD countries also starting to impose costs by 2030. The complaint alleges that in making many of its investment … Read more
On November 15, 2018, Assistant Attorney General Makan Delrahim delivered remarks at the American Bar Association Antitrust Section Fall Forum in which he discussed three recent settlements of ongoing civil and criminal investigations and highlighted efforts by the Antitrust Division of the U.S. Department of Justice (“Division”) to streamline the merger review process. There are several unusual aspects to the Division’s recent actions, including the Division’s use of Section 4A of the Clayton Act to recover civil damages where the government has been harmed by anticompetitive conduct and the Division’s willingness to police the sharing of information among competitors even … Read more
I suspect that most issues of contract interpretation call for the application of what Stefan Vogenauer has termed “universal hermeneutic truths”—that is, the search for meaning by going no further than “common sense” and how language is “commonly and naturally deployed.” An arbitrator does this not only by worrying the text of an agreement, but more broadly by attempting to identify the underlying narrative—the sense of the transaction. These are universal lawyerly skills. And should an agreement run out of guidance for settling a dispute, a further step would move from interpretation, as commonly understood, to the process of filling … Read more
About 5 percent of U.S.-based publicly-traded firms now have female chief executive officers. While much has been written about the challenges women face in their ascent to top leadership positions, little is known about what happens to them once they break through the proverbial glass ceiling and become CEOs. The CEO remains the most powerful corporate position in the business world, but those who occupy it serve at the discretion of the board of directors. The corporate governance literature generally considers the power to fire chief executives key to corporate control and the ultimate recourse for boards in monitoring firm … Read more
Institutional shareholders’ role in corporate governance and their effect on firm value have been explored, both theoretically and empirically, mainly in the context of dispersed-ownership environments like the United States or the United Kingdom. In these common law countries, institutional investors play an active role, initiating proposals of their own regarding compensation  and appointment of board members.  In other countries, however, where corporate ownership is more concentrated and controlling shareholders are more prevalent, institutional investors are expected to fulfill a different function, namely, to protect minority shareholders in their conflict with controlling shareholders by, for example, voting against … Read more
In recent years, Initial Coin Offerings (ICOs) have emerged as a disruptive tool in entrepreneurial finance. ICOs involve the sale of a stake in a project with the aim of raising funds at an early stage of development. Although ICOs share some similarities with both IPOs and crowdfunding campaigns, they also differ, and in the last few months ICOs have significantly evolved in an effort to improve. Interactive Initial Coin Offerings (IICOs), Initial Supply Auction, the Simple Agreement for Tokens (SAFT), airdrops (free of charge distribution of tokens), Security Token Offerings (STOs), and the “reversible ICO” (RICO) are all examples … Read more
The proxy season is just around the corner for calendar year public companies, and, ahead of the season, two major proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis, recently released their 2019 policy updates. ISS’s 2019 policy updates and Glass Lewis’s 2019 policy guidelines, which are generally consistent with the 2018 versions, provide guidance on how ISS and Glass Lewis will make recommendations on companies’ “say-on-pay” vote. As a reminder, the say-on-pay vote is a non-binding advisory vote by shareholders of public companies on the compensation of the CEO, CFO and three other “named executive officers” whose … Read more
While director independence has become a topic of global importance, the definition of independence and the role of independent directors remain unsettled, depending largely on ownership patterns, industry structure, and regulatory goals. The main agency problem in diffusely owned firms is opportunism on the part of the management, and independent directors are required to protect the interests of shareholders vis-à-vis the management, In controlled firms, however, independent directors are mainly called upon to protect minority shareholders vis-à-vis controlling shareholders. Therefore, in a context of concentrated ownership, independent directors are mainly responsible for vetting operations involving conflicts of interest and preventing … Read more
On November 15, 2018, the U.S. Securities and Exchange Commission’s (the “SEC” or the “Commission”) Office of the Whistleblower (the “OWB”) provided its annual report to Congress describing the status of the whistleblower program and touting a “record-breaking year” for the program. The Report highlights that the OWB received more than 5,200 whistleblower tips last year, a 20 percent increase over last year, and awarded more than $168 million to 13 individuals, which was more than the OWB had awarded in all its prior years combined. Aside from the record numbers of rewards and tips, in the past … Read more
In the last few years, an increasing number of digital platforms have launched initial coin offerings (ICOs). ICOs are primarily studied from the perspective of securities laws. In a new paper, however, I examine how bankruptcy law applies to entities that have tokens in their investment portfolios. What happens, for example, if a debtor that owns tokens becomes insolvent and is subject to insolvency proceedings? How can tokens be made available to the debtor’s creditors? How can the bankruptcy stay be preserved? And how can rules against fraudulent conveyances be enforced?
In general, when insolvency proceedings are opened against a … Read more
The ever-evolving challenges facing corporate boards prompt an updated snapshot of what is expected from the board of directors of a major public company—not just the legal rules, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior. Today, boards are expected to:
- Oversee corporate strategy and the communication of that strategy to investors, keeping in mind that investors want to be assured not just about current risks and problems, but threats to long-term strategy from global, political, social, and technological developments;
- Determine the board’s response to proposed legislation like Senator Elizabeth
… Read more
The debate over board leadership does not seem to go away especially in the U.S. where market participants have long agreed on the need for greater independence in principle, while largely disagreeing on the measures required to put it into practice. Some feel strongly that an independent Chair is absolutely essential, while others believe that an appropriately empowered independent Lead Director can also provide sufficient independent leadership.
Along the lines of the former, shareholder calls for stripping CEOs of the Chair role tend to arise whenever CEO-led boards fail in their management oversight roles. Tesla Inc. was recently forced to … Read more
October 2018 ended with the hedge fund industry suffering its worst monthly decline since September 2011, according to the HFRI Fund Weighted Composite Index. Some commentators are predicting that 2018 will end with the hedge fund industry experiencing its worst annual performance since the failure of Lehman in 2008. This news comes on the heels of a disastrous decade for hedge fund performance. In the years following the financial crisis of 2007-2009, the S&P 500 consistently outperformed the hedge fund industry. Even Warren Buffet famously predicted that a basket of hedge funds would underperform the S&P 500 over a 10-year … Read more
A recent decision of the Delaware Court of Chancery highlights the need for boards of directors of Delaware publicly traded companies to develop heightened awareness and vigilance in responding to shareholder activists, particularly those following a short-term agenda of putting the company up for sale. The failure of boards to do so may put all directors at risk of being found in breach of their fiduciary duties.
The factual background of the court’s decision in In re PLX Technology Inc. Stockholders Litigation may sound familiar to many public company directors. Following the December 2012 termination of a pending sale … Read more
We take for granted that an Apple iPhone can “talk” with a Samsung Galaxy smartphone and a Dell laptop can communicate with an HP printer. As I describe in a new paper, this ubiquitous interoperability has relied on a standardization infrastructure involving the cooperative efforts of multiple firms. Some of those firms focus on the R&D that contributes technologies toward the standard-setting process and others specialize in embedding those technologies in smartphones, laptops, and other devices. This multi-firm mechanism contrasts favorably with the historically dominant alternatives of achieving standardization through a single entity: a government monopoly, which suffers from informational … Read more
Negotiators for the European Union and the United Kingdom have agreed a 585-page draft withdrawal agreement (the “Withdrawal Agreement”). A copy of the Withdrawal Agreement can be found here.
The draft Withdrawal Agreement sets out how and when the UK will leave the EU and will be legally binding. A separate, non-binding draft declaration (available here) sets out the aspirations for the future trading relationship between the UK and EU (this draft declaration is still being negotiated, with the UK and EU expected to agree a final draft this week).
This long-awaited “divorce deal” has been … Read more
One of the mysteries in life is how different jurisdictions can be faced with the same legal problem and manage to come up with the same wrong answer. Case in point. Both English and American contract law hold that if a buyer cancels an order (breaches) and the seller resells the item at the same price, the seller’s remedy need not be the contract/market differential (zero). Rather, they both say, if the seller could have sold this item and another as well, the seller could have made the profits on both items. The seller would be a “lost volume seller” … Read more
On November 14, 2018, the Commodity Futures Trading Commission (CFTC) Division of Enforcement released an annual report, apparently the first of its kind.1 In a speech given at New York University School of Law, James M. McDonald, director of the Division of Enforcement, remarked that the report confirms that the past fiscal year has been “among the most vigorous in the history of the CFTC.”2 Highlighting key points from the report, McDonald expanded on CFTC Chairman J. Christopher Giancarlo’s October 2, 2018, speech on the CFTC’s recent enforcement record. 3
McDonald stated that the CFTC’s enforcement program over … Read more
On October 18, federal regulators released the largest U.S. insurance group, Prudential Financial, Inc., from enhanced government oversight. Prudential had been the last remaining systemically important financial institution (SIFI)—a designation Congress created in the Dodd-Frank Act for nonbank financial companies that could threaten U.S. financial stability. Prudential’s deregulation fulfills a years-long effort by Dodd-Frank critics to weaken a crucial post-crisis regulatory reform.
In my new essay, “The Last SIFI: The Unwise and Illegal Deregulation of Prudential Financial, Inc.,” I contend that overturning Prudential’s “systemically important” status was not only misguided, it was also against the law. By illegally … Read more
We have recently seen an increase in contentious disputes, some public and many not, between companies and their debt investors. Clashes between borrowers and their lenders are as old as debt itself, but what we are seeing now is something different. In these situations, debt investors are not merely seeking to enforce their contractual entitlement to payment, or to challenge transactions that will impair the borrower’s ability to pay. Rather, they are purchasing debt on the theory that the borrower is already in default and then actively seeking to enforce that default in a manner by which they stand to … Read more
In the past year, the departures of several female CEOs have made headlines, raising concerns about a potential reversal in the growing trend of women in executive leadership roles. Meg Whitman (Hewlett-Packard Enterprise Co.), Indra Nooyi (PepsiCo Inc.), and Irene Rosenfeld (Mondelez International Inc.) are a few prominent examples that come to mind. While the data does not suggest a reversal to fewer women in top executive roles, we observe slower growth in the number of female CEOs as compared to the number of women directors, raising questions about gender biases in executive leadership … Read more
On June 18, 2018, the Supreme Court granted cert in Lorenzo v. Securities and Exchange Commission (Lorenzo), a case that presents significant questions about the federal securities laws. Lorenzo also comes with a twist: The underlying D.C. Circuit decision on appeal features an extensive dissent by then-Judge Brett Kavanaugh, the newest Supreme Court justice. As a result, when the Supreme Court issues its decision on Lorenzo in the Spring of 2019, it is likely that he will be recused while the other eight justices sit in review of their new colleague.
In our forthcoming article, “Justice Kavanaugh, Lorenzo v. … Read more
In recent years, we have seen significant advances in technologies – including blockchain and other distributed ledger technologies – that impact our securities markets. This statement highlights several recent Commission enforcement actions involving the intersection of long-standing applications of our federal securities laws and new technologies.
The Commission’s Divisions of Corporation Finance, Investment Management, and Trading and Markets (the “Divisions”) encourage technological innovations that benefit investors and our capital markets, and we have been consulting with market participants regarding issues presented by new technologies. We wish to emphasize, however, that market participants must still adhere to our well-established … Read more
Why do for-profit corporations have charitable foundations? Charitable foundations are burdensome to create, costly to administer, may be constrained by payout requirements and excise taxes, and are not necessary for corporations to make charitable donations. Yet as of 2013, 203 of the S&P 500 publicly traded companies had such foundations. That corporate foundations are so common despite their costs suggests that foundations create substantial benefits for corporations or corporate managers. Our new research demonstrates that corporate foundations are a sign of, and vehicle for, self-dealing by entrenched corporate executives.
We demonstrate that foundations play a role in self-dealing in two … Read more
On November 10, the U.S. government’s pilot program regulations aimed at monitoring and controlling foreign investment in certain “critical technologies” became effective. How might the program, which follows on the recent statutory expansion of CFIUS review, affect tech companies’ ability to raise investment capital from foreigners?
Companies in the technology sector—including telecommunications, software, manufacturing and biotechnology—are likely familiar with potential CFIUS review of transactions where foreign persons’ acquisition of control of U.S. businesses raises national security concerns. Notably, the concept of “control” goes well beyond having a majority voting interest and includes governance rights and significant economic stakes that would … Read more
The most important issue in corporate governance today is dual class capitalization, and the most important recent development is the petition submitted on October 24, 2018 by the Council of Institutional Investors (“CII”) to both the New York Stock Exchange and Nasdaq, asking them to place a “sunset” on differentials in voting rights. Under the CII’s proposal, both exchanges would agree not to list an initial public offering (“IPO”) that had dual classes of stock with different voting rights, unless the disparity in per share voting power ended no later than seven years after the IPO. The CII sees this … Read more
M&A activity in October 2018 remained mixed, but included more positive indicators compared to September and the general declining trend line so far this year. Deal volume by dollar value significantly increased overall, by 98.2% to $154.56 billion in the U.S., and by 35.5% to $328.77 billion globally. The number of deals, however, decreased slightly overall, by 2.6% to 371 in the U.S. (among the lowest levels since the beginning of this publication in 2012) and by 4.5% to 2,248 globally.
Strategic vs. Sponsor Activity
Reversing a more typical trend over the last year, strategic deals showed less strength … Read more
Good morning and thank you to the Divisions of Corporation Finance and Investment Management for organizing this roundtable. I hope that everyone here will take this opportunity to engage in a thoughtful, meaningful discussion on the proxy process. If the process were perfect, we would not be here today. The topics on the agenda have the tendency to get emotional. Trust me, we know where most, if not all, of you stand on the issues. You have a platform today and I hope you use it to provide us with specific examples, data, and facts rather than generalities or anecdotes. … Read more
Accounting rule makers have long debated whether companies should recognize intangible assets on their balance sheets. At the heart of this debate is whether recognized values can predict future income and cash flows, or whether the high degree of measurement uncertainty embedded in intangible asset values precludes such predictive ability. While many agree intangibles like patents, trademarks, and goodwill contribute significantly to value creation and profitability, separately identifying and reliably measuring intangibles is costly. In fact, due to measurement-related concerns, accounting rules generally do not allow companies to recognize internally generated intangibles on their balance sheets. Intangibles acquired externally in … Read more
Credit ratings provide information regarding a company’s default probability. Ratings are relied upon extensively in regulation and private contracting and play a crucial role in the functioning of the capital markets. However, since the major credit rating agencies (CRAs) operate under a business model whereby they are paid by their issuers, there is reason to believe that issuer-paid ratings are inflated. Many market observers view this conflict of interest as a contributing factor of the global recession of 2008-2009. This indictment has also allowed for the emergence of several CRAs that operate under an alternative “investor-pays” business model, which some … Read more
For the past several years, Republican majorities in the House of Representatives and Senate have dictated the agenda of Congress. But Democrats will take control of the House in January 2019, thereby regaining the ability to control committee and subcommittee agendas, hold hearings and issue investigative subpoenas.
Companies can expect the new Democratic majority in the House to employ these tools to vigorously pursue vastly different legislative and investigative priorities than Republicans. Indeed, Democrats such as Reps. Elijah Cummings and Adam Schiff have been vocal about perceived Republican efforts to thwart certain oversight committees’ pursuit of various lines of inquiry, … Read more
Anonymous political speech has a celebrated history (Publius, 1787) and has long enjoyed strong protections under the U.S. Constitution. But there is a dark side to pseudonymity: Fictitious identities can wreak havoc in financial markets. A large literature in economics examines why markets are vulnerable to rumors and information-based manipulation (Benabou & Laroque, 1992; Van Bommel, 2003; Vila, 1989). In a review of this body of work, Putnins (2012) emphasizes the importance of reputation: “if market participants are able to deduce that false information originated from a manipulator, the manipulator will quickly be discredited and the manipulation strategy will … Read more
On October 23, 2018, the Division of Corporation Finance of the Securities and Exchange Commission (the SEC) issued new Staff Legal Bulletin 14J, following up on previous bulletins clarifying issues arising under Exchange Act Rule 14a-8. The new bulletin addresses the Division’s views on:
- Board of directors analyses provided in no-action requests that seek to rely on the “economic relevance” exception or the “ordinary business” exception as a basis to exclude shareholder proposals from a company’s proxy materials;
- the scope and application of micromanagement as a basis to exclude a proposal under the “ordinary business” exception; and
… Read more
Identity is fundamental in finance. At a time when huge TechFins like Amazon are making inroads into the financial services industry, major questions are arising as to the most effective methods of customer identification and meeting Know Your Customer obligations (KYC). Does the solution lie in redefining identity, in the methodology of retrieving identification, in some mix of the two, or in other ways? We have recently explored these issues, here.
To date, forms of analogue and digitized identity (i.e paper documents and scanned ID documents respectively) have been relied upon to prove an individual’s identity to, say, a … Read more
As 2018 draws to a close, both Institutional Shareholder Services Inc. (“ISS”) and Glass Lewis are in the process of updating their 2019 proxy voting guidelines.
In mid-October, ISS launched its 2019 benchmark voting policy consultation period, pursuant to which ISS solicits feedback on certain of its proposed voting policies for the upcoming proxy season. This year, ISS requested comment on proposed policies for U.S. public companies related to board gender diversity and its pay-for-performance model, as described in greater detail below. ISS plans to announce its final policy changes in mid-November.
In addition, Glass Lewis recently released its 2019 … Read more
Effective and sustainable shareholder engagement is a cornerstone of the corporate governance model of listed companies, which is based on a system of checks and balances among boards, management, and stakeholders. Enhancing the involvement of shareholders in corporate governance is therefore an important factor in improving the financial and non-financial performance of companies, particularly with respect to environmental, social, and governance issues, as set forth in the United Nations’ principles of responsible investment (Recital 14 of the Directive, available here). And this is even more the case in view of the fact that the increased involvement of all stakeholders, … Read more
Institutional Shareholder Services Inc. (ISS) appreciates the opportunity to comment in advance of the SEC Staff Roundtable on the Proxy Process that is scheduled for November 15, 2018. We focus these preliminary comments on two primary areas, proxy advisory firms and the proxy process.
Proxy Advisory Firms
As a registered investment adviser, we have a fiduciary obligation to our clients to provide advice that is in their best interest. In the free market, our clients hire us because we provide services they value and deem to be cost-effective. We listen to our clients and make our vote recommendations based on … Read more
Professor John C. Coffee, Jr. of Columbia Law School speaks with John Metaxas (Columbia Law ’84) about insider trading law and his role on a new task force created to develop proposals for reform in this area. The task force will be chaired by Preet Bharara (Columbia Law ’93), the former U.S. attorney for the Southern District of New York. Coffee explains that the time is ripe for the panel, given uncertainty surrounding the largely court-created rules on insider trading and the need for clearer guidance from Congress or the Securities and Exchange Commission. The panel’s members will include academics, … Read more
On November 2, 2018, the U.S. Securities and Exchange Commission’s (“SEC” or “Commission”) Division of Enforcement released its 2018 Annual Report (“Report”) which presents and assesses the Division’s accomplishments during the 2018 Fiscal Year (“FY”). The statistics, as well as narrative discussion in the Report, reveal an active Division focused on pursuing cases impacting retail investors, such as investment adviser fraud, as well as actions directed at the impact of emerging technological changes on the securities market, such as cryptocurrencies and cybersecurity. While the penalty and disgorgement numbers were similar to last year, this was primarily because of the … Read more
Every security traded in public markets represents several data points that can be valuable to future trades (not to mention compliance). The Regulation National Market System (or “Reg NMS”) grants exchanges, licensed as self-regulatory organizations (“SROs”), the responsibility to disseminate market data consolidated from their platforms. Exchange data is vital to matching orders, especially in today’s electronic and automated markets.
Like most “platform” companies, exchanges seek to monetize the data generated by their trading platforms. This market data has obvious value: Virtually instantaneous access to granular information on previous trades translates into clear competitive advantages for market participants. Exchanges … Read more