Editor’s Note: This and the following two pieces are responses to our January 2, 2019, symposium on dual class shares.
I welcome the opportunity to share a few observations on Professor Coffee’s two CLS Blue Sky Blog posts (here and here) on dual class common stock, and those of professors Gordon, Goshen, and Mitts written in response, from the perspective of a practicing IPO lawyer.
I think it would be helpful for us all to consider the proposition that two private parties might rationally agree that one party will acquire the majority of the cash flow … Read more
I would like to make two points in response to Professor Coffee’s piece on dual class common stock.
First, American dual class companies should be obliged to include a “coattail” provision, as is the case in Canada. This provision, imposed since 1987 by the Toronto Stock Exchange, ensures the controlling shareholder cannot sell control without all shareholders being offered the same price and conditions for their shares. This provision removes an important source of potential “private benefits” of control.
Second, In the coming years, a battle will rage about sunset clauses, particularly of the time-based sort. An organized effort is … Read more
Why have some corporate governance scholars (here, here, and here) advocated for imposing various sunset provisions on dual class shares? After all, dual class share structures are simply the result of private ordering, that wonderful freedom provided by corporate law that, in the words of former SEC Commissioner Troy Paredes, “allows the internal affairs of each corporation to be tailored to its own attributes and qualities, including its personnel, culture, maturity as a business, and governance practices.” In effect, as several scholars have noted, “observed governance choices are the result of value maximizing contracts between shareholders … Read more
Can social media help firms improve communication with investors? In a recent paper, I argue that social media communication can give a firm an advantage over competitors in attracting attention to earnings announcements and lead to stronger price reaction to news announcements. This is because investors have limited resources for acquiring and processing to information, and social media makes it easy for them—and particularly retail investors—to learn about company results.
To test the hypothesis, I look at FTSE100 companies that are active users of social media. For example, 64 percent of FTSE 100 companies used Twitter to communicate with investors … Read more
M&A activity in December 2018 declined across most measures. While M&A activity reached 12-month lows both globally and in the U.S., the declines in the U.S. were significantly more pronounced. Deal volume by dollar value decreased, by 55.2% to $65.36 billion in the U.S., and by 17.4% to $216.72 billion globally. In the U.S. the average value of announced public mergers declined to a 12-month low of $1.35 billion. Figure 4. The number of deals also decreased, by 17.3% to 430 in the U.S., and by 12.6% to 2,250 globally, hitting the lowest levels for number of deals … Read more
Activist campaigns are on the rise on both sides of the Atlantic. Even large-cap companies are increasingly targeted by activists—particularly hedge funds—with remarkable success. A big reason for that success is the support that activist proposals attract from traditional institutions, such as actively managed mutual funds, pension funds, and passive index-tracking investors. Hence, hedge funds primarily seek targets whose shareholder base features a significant proportion of institutional investors. This does not mean, however, that activists only focus on companies with widely dispersed ownership; they also target controlled companies. Minority-empowering shareholder tools, such as the right to nominate and elect some … Read more
Debate continues to rage among politicians, professors, senior lawyers, and members of the media over the regulation of hedge fund activism. The primary criticism is that, in the absence of merger and acquisition activity, such activism does not create value for the target company’s shareholders in the long-term. Furthermore, even in the event of a hedge fund activist-initiated merger, studies have indicated that value-creation is limited to short-term stock price boosts and takeover premia.
With the objective of examining whether hedge fund activists are indeed “wolves,” as described by critics whose goal is to extract short-term profits, we recently wrote … Read more
We summarize below the key impact of the federal government’s partial shutdown on M&A transactions, SEC and Investment Adviser filings and registrations, government contracts, and litigation. This information may change if the shutdown continues for a lengthy period.
In general, a significant percentage of federal government employees have been furloughed. Some members of the federal workforce are continuing to work without pay but most federal agencies are operating with extremely limited staff. Most agencies are not continuing to process filings that were pending when the shutdown began and are not processing new filings. In addition, most agencies are not now … Read more
Judges, legislators, corporate practitioners, and scholars of business law all conduct their work, within their respective professional spheres, based on some working conception of what “corporate law” is. Strangely, however, the question of what this conceptual vessel actually contains is seldom asked, let alone answered with any specificity. In a recent paper, I investigate the domain of corporate law – that is, the scope, content, and boundaries of the field. In so doing, I aim to illuminate why it is that defining the field with any precision has been so difficult, and what such insights have to tell us … Read more
The credit bull market finally exhibited signs of fragility in the fourth quarter of 2018, putting the brakes on what had seemed poised to be another banner year for corporate borrowers. The skies may yet clear, but for savvy borrowers the New Year is a good time to prepare for turbulence. Looking ahead to 2019, we contemplate strategies for M&A in choppy financing markets, the practical impact of credit rating downgrades, and the risks posed by the rise of “default activism” in the debt markets.
The Financing Markets in 2018: A Sharp Transition
A Hot Start…
Through its first three … Read more
Gig workers, who are hired to complete a project, or “gig,” constitute a significant portion of the workforce. The McKinsey Global Institute states that gig workers make up between 20 and 30 percent of all workers in the U.S. and the European Union, and U.S. News estimates that gig workers comprise 33 percent of U.S. workers. Also, gig workers are not confined to the technology industry. A 2016 report from the Bureau of Labor Statistics finds that gig workers exist throughout the corporate and civic sectors, including construction, retail, health services, and the arts. Also, by 2028, many economists expect … Read more
As the world greets the New Year, investors and companies may take a moment to reflect on key corporate governance priorities in light of a potentially more challenging business environment in the year ahead. The prospect of slower global economic growth, combined with a higher cost of borrowing, and continued uncertainty regarding global trade will demand watchful management of a new set of risks in both developed and developing markets. Macroeconomic trends will likely have an impact on firm performance and companies’ balance sheets, raising greater awareness of audit quality concerns and executive compensation practices. Meanwhile, many governance topics that … Read more
In a new paper, we investigate how initial public offerings affect peer-to-peer lending platforms and, more specifically, whether the platforms tend to alter their operational decisions in anticipation of going public.
Peer-to-peer lenders are essentially online services that match anonymous lenders with borrowers at a lower cost than traditional banking institutions do. Consequently, borrowers can pay lower interest rates, and lenders can potentially earn higher returns. Interest rates are usually set by an intermediary platform on the basis of the borrower’s creditworthiness (based on features such as credit score, employment status, annual income, debt-to-income ratio, and credit history). The intermediary … Read more
Board Was Required to Disclose the Chairman’s Reasons for Abstaining From a Board Vote on the Sale of the Company
On February 20, 2018, the Delaware Supreme Court reversed dismissal of a shareholder action alleging that the board of directors failed to disclose the reasons why the chairman of the board, who was also the company’s founder, abstained from a board vote on the sale of the company. Appel v. Berkman, 180 A.3d 1055 (Del. 2018) (Strine, C. J.). The court rejected defendants’ contention that “the reasons for a dissenting or abstaining board member’s vote can never be material.” … Read more
A number of recent news stories have recounted the quick and dramatic changes that activist hedge funds trigger in the companies they target. In the Atlantic magazine, for example, a 2016 article describes DuPont’s decision to cut 10 percent of its workforce in response to an activist campaign by investor Nelson Peltz and his company Trian Fund Management. The recent saga involving David Loeb’s Third Point hedge fund and Campbell Soup illustrates the typical pattern where activist investors take a small but meaningful stake in a target company and demand significant say over the strategic and financial policies of the … Read more
On December 20, 2018, the Federal Reserve and the Federal Deposit Insurance Corporation (together, the “Agencies”) issued final guidance (the “Final Guidance”) with respect to future resolution plan submissions under Title I of the Dodd-Frank Act by the eight U.S. Global Systemically Important Banks (U.S. G‑SIBs), including the plan submissions that are due July 1, 2019. The Final Guidance adopts, and addresses comments provided in response to, the proposed resolution planning guidance the Agencies issued for comment on June 29, 2018 (the “Proposed Guidance”). Like the Proposed Guidance and the foundational guidance issued by the Agencies in … Read more
Do U.S. companies focus too much on short-term profits at the expense of long-term investments, profits, and growth? There is considerable debate among academics, practitioners, and politicians about the relevance of short-termism, its possible sources, and potential mechanisms to mitigate it.
In a recent article, I propose that earnings-per-share (EPS) targets are a very likely driver of short-termism and discuss what we can do to break the link between EPS targets and short-termism. Earlier survey evidence shows that managers admit to short-termism driven by earnings management—they are willing to sacrifice positive net present value long-term investments to meet earnings goals.… Read more
Interest in cryptocurrencies and other digital assets on blockchains or distributed ledgers has increased exponentially in recent years. The total market capitalization of cryptocurrencies and other digital assets on blockchains increased from slightly more than $17.5 billion in January 2017 to an all-time high of more than $813.5 billion in January 2018. While prices and market capitalization have dropped significantly since then, readings in the neighborhood of $135 billion as of late November 2018 still suggest significant, longer-term interest in digital assets for investment and other purposes.
Significant uncertainties remain, however, in applying existing laws, regulations and practices … Read more
Initial coin offerings (ICOs) have recently emerged as a popular method of financing blockchain-related startups. In an ICO, a startup creates and distributes its digital tokens, typically in exchange for Bitcoin, Ethereum, or fiat currencies such as U.S. dollars to raise capital to fund its operations. The startling growth of this market, coupled with rampant speculation and volatility, has both generated excitement and raised concern about potential exploitation or fraud.
In a new paper, we study “pump-and-dump” schemes (P&Ds) in the cryptocurrency market. P&D is a form of price manipulation that involves artificially inflating an asset price before selling … Read more
On December 11, Judge Denise Cote of the Southern District of New York granted, in part, the Securities and Exchange Commission’s (“SEC”) motion for summary judgement in its action against Alpine Securities, Inc. (“Alpine”), finding that the clearing broker was liable for thousands of violations of Rule 17a-8 of the Securities Exchange Act of 1934 (“Exchange Act”), which requires broker-dealers to report potentially illegal trading activity under the Bank Secrecy Act (“BSA”). This enforcement action is significant in numerous respects, including the question raised repeatedly by Alpine – and what appears to be one of first impression – as … Read more
Just as the Mamas & the Papas pioneered the folk-rock scene of the 1960s as one of the first truly gender diverse music group, their native state of California is breaking ground for increased board gender diversity in the United States. Unlike a growing number of countries in Europe and around the globe that have instituted comply-or-explain policies and/or gender diversity quotas, the U.S. has not implemented regulatory requirements in relation to board gender diversity. The record-breaking influx of female board members observed in the past two years is primarily driven by private ordering through company-shareholder engagement, shareholder proposals, and … Read more
On December 19, 2018, the Delaware Court of Chancery held that forum selection provisions contained in the certificate of incorporation of Delaware corporations are invalid to the extent that they require any claim under the Securities Act of 1933 to be filed only in federal court.
Congress enacted the Securities Act of 1933 (the 1933 Act) after the stock market crash of 1929. The 1933 Act requires a company offering securities to the public “to make full and fair disclosure of relevant information” by filing a registration statement with the Securities and Exchange Commission. In order to ensure compliance with … Read more
By many accounts, we have entered an era of unprecedented contentiousness in debtor-creditor relations. For an example of the new status quo, consider the recent actions of PetSmart, a perfectly normal American corporation struggling with debt from a leveraged buy-out gone sour. The textbook account of corporate governance would suggest that PetSmart’s board of directors would respond to this financial distress by seeking to improve the underlying business or, perhaps, by filing for Chapter 11 bankruptcy to maximize the value of the firm for the benefit of creditors. Instead, PetSmart’s board authorized a transaction that seems shocking for a firm … Read more
As we noted in early 2018, the threat of activism continues to be high, and has become a global phenomenon. The conclusion of a volatile and dynamic 2018 prompts a brief update of the state of play.
- Activist assets under management remain at elevated levels, encouraging continued attacks on large successful companies in the U.S. and abroad. In many cases, activists have been taking advantage of recent stock market declines to achieve attractive entry points for new positions. These trends have been highlighted in several recent media reports, including in The Wall Street Journal and Bloomberg.
- While the robust
… Read more
In his December 17 piece, “Dual Class Stock: What Is a Fair Compromise?,” Professor John Coffee asked readers to suggest alternatives to his proposal for limiting dual class shares. We are posting below three insightful responses from Columbia Law School professors Jeffrey Gordon, Zohar Goshen, and Joshua Mitts, followed by a brief counter-response from Professor Coffee. We would like to keep the conversation going, however, and would welcome further proposals on this issue—with explanations—especially from practicing lawyers. Please email pieces of no more than 400 words to me at firstname.lastname@example.org. Thanks much.… Read more
Professor Coffee’s two CLS Blue Sky Blog pieces on dual class common stock (here and here) provide a welcome stimulus for further reflection.
The debate over dual class common arises at the hinge of public law vs. private law conceptions of corporate governance. In the early 20th century, dual class common stock was used by financiers to retain control of the companies that they shepherded to public stock markets. You could certainly spin a private law story that the bankers used their control to minimize managerial agency costs and to provide reputational services at a time of … Read more
The debate over dual class firms has morphed from an objection to their very legitimacy to a demand to subject them to a mandatory sunset provision. My colleague and friend, Professor John Coffee, believes that dual class firms are undesirable and should be restricted, but, to his credit, he exposes the problems with mandating the sunset and suggests ways for improvement. Here, I wish to explain why restricting dual class firms might be costly to the economy.
The objection to dual class firms is familiar. In dual class firms, managers hold incontestable control through high voting shares, with a much … Read more
Professor Coffee makes the insightful point that if founders receive a lower price for their stock when they retain voting control, it does not seem fair to allow other shareholders to take away that control without compensation. But, Professor Coffee argues, if shareholders can take away founders’ control without compensation, then founders should not receive less when they retain voting control, because such control is largely “illusory” in his words. Of course, this argument may bring back memories of the economist’s admonition not to pick up the (obviously fake) $100 bill on the floor. Clearly, markets can get out of … Read more
Forever is a long time — indeed, too long. That is the essence of my answer to my two friends and colleagues — professors Zohar Goshen and Joshua Mitts — who each argue against mandatory sunset provisions on super-voting stock (Professor Gordon provides an overview with which I largely concur). Even if one accepts the Goshen/Mitts premise that the other shareholders want the founder to have total control (in order to pursue his “idiosyncratic vision” for the company), the probability is high that, at some point, the majority of the shareholders will want to limit or end that total control. … Read more
In a recent paper, I argue that the criminal law needs what I call a functional approach to corporate knowledge. When the law treats corporations as though they know things, it affects how they manage information. Knowledge, in one form or another, is an element of the most frequent corporate crimes—false claims, money laundering, tax evasion, etc. Doctrines for attributing knowledge to corporations vary by jurisdiction and sweep different types of information within their scope. The control test is the most restrictive, and attributes knowledge to corporations when high-ranking personnel are involved. Respondeat superior goes … Read more
The role of anti-takeover provisions (ATPs) in the corporate charters of firms has recently become a matter of considerable debate in the academic literature. On the one hand, earlier studies have argued that ATPs entrench firm management and therefore depress firm performance by mitigating the disciplining effect of the market for corporate control on firm management (Field and Karpoff (2002)). On the other hand, more recent papers have argued that ATPs in fact improve firm performance post-IPO. Chemmanur, Paeglis, and Simonyan (2011) argue that ATPs allow higher quality top management teams to create long-run value for the firm post-IPO and … Read more
On December 13, 2018, the U.S. Securities and Exchange Commission (“SEC”) announced a settled enforcement action against private equity adviser Yucaipa Master Manager, LLC (“Yucaipa”) for alleged negligent failure to disclose conflicts of interest and misallocation of fees and expenses to the funds it advised. The action originated from concerns raised by staff from the Office of Compliance Inspections and Examinations. Yucaipa paid nearly $3 million to resolve the case.
The SEC’s order faulted Yucaipa for not providing pre-commitment disclosure that compensation of in-house employees who assisted in preparing the funds’ tax returns would be allocated to fund clients … Read more
In recent years, large asset managers and other institutional investors have come to own increasingly large shares of firms that are competitors. For instance, BlackRock owns shares of both Bank of America and JPMorgan Chase. Such common ownership is prevalent in many industries. For example, the graph below illustrates the prevalence of common ownership in the U.S. banking industry. It shows the ownership stakes by the five largest bank shareholders in seven of the largest U.S. banks, and in all public banks combined:
Figure 1 Ownership stakes by the five largest bank shareholders in seven of the largest U.S. banks, … Read more
Complex capital structures are prevalent in many recent high-profile Chapter 11 bankruptcy cases. One recent example is Toys ‘R’ Us, whose debt structure was, as characterized by Bloomberg Businessweek, “as complex and precarious as a Jenga tower. ” It included dozens of subsidiary entities, with separate debt facilities against entities owning the intellectual property, the real estate, and international operations, among other asset groups. Why do capital structures become fragmented and complex in this way, and what are the implications for bankruptcy law?
In my working paper, Disagreement and Capital Structure Complexity, I suggest one reason why a firm’s … Read more
In recent years, it has become increasingly evident that the activism-driven corporate world is relatively fragile and is proving to be unsustainable, particularly when viewed in the broader context of rapidly changing political and social norms and increasing divisiveness across many planes of the social contract. The exponential widening of income inequality, the increasing sense of urgency around climate change, and the widespread socioeconomic upheaval resulting from the displacement of human capital by technology have all been filtering into the debate about the role and governance of the corporate ecosystem. Persuasive academic and empirical evidence has established the causal link … Read more
The unnerving events of fall 2008 removed all doubt that investment banks and other nonbank financial firms can propagate systemic risk and endanger the world’s financial system. In response, Congress instituted a robust system for regulating systemic risk posed by nonbanks. The Dodd-Frank Act created two approaches to nonbank systemic risk regulation. The first, known as entity-based regulation, authorized the new Financial Stability Oversight Council (FSOC) to designate individual nonbank financial firms as systemically important financial institutions (SIFIs) for heightened regulation and oversight by the Federal Reserve. The second, dubbed activities-based regulation, gave FSOC the power to make … Read more
With the exception of sponsor-related transactions, M&A activity in November 2018 generally declined. Deal volume by dollar value decreased, by 9.1% to $141.10 billion in the U.S., and by 21.4% to $254.76 billion globally. The number of deals also decreased, by 11.1% to 431 in the U.S. and by 12.8% to 2,272 globally, hitting the lowest levels for number of deals both in the U.S. and globally in the history of this publication.
Strategic vs. Sponsor Activity
In line with October, the sponsor M&A market performed better than strategic deals. The number of strategic deals decreased in November 2018 … Read more
Prices convey information. Hayek (1945) put it this way: Prices “coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan.” Stock prices, in particular, matter a great deal in corporate and securities law. Event studies, which measure statistically significant changes in stock prices, are widely used by investors and courts to infer the effect of an event on the value of a firm (Bhaghat & Romano, 2002b).
In my recent article, I ask a basic question: What can we learn from stock prices? It is a … Read more
December 2017 marked a milestone in the short history of virtual currency. On Friday, December 1, 2017, the Chicago Mercantile Exchange Inc. (CME) and the CBOE Futures Exchange (CFE) self-certified new contracts for cash-settled bitcoin futures products. The self-certification process allows designated contract markets (DCMs) to list new derivative products one day after submitting in writing to the Commodity Futures Trading Commission (CFTC) that the product complies with the Commodity Exchange Act (CEA) and CFTC regulations.
Prior to December 2017, there were limited options for investors that wanted access to bitcoin derivatives. In 2014, TeraExchange, LLC, a Swap Execution Facility … Read more
In my last post, I focused on the Council of Institutional Investors’ (“CII”) recent proposal to the New York Stock Exchange and Nasdaq to impose a listing condition that any super-voting rights on dual class stock must expire within at least seven years of listing. Although I sympathized with the CII’s goal and believe dual class capitalizations to be undesirable in the case of a public corporation, I also recognized that we cannot expect the holder of a control block to stand by passively and watch his voting power dissipate. Thus, as I noted, the control holder might … Read more
In the last decade, private equity sponsors increasingly have pursued “strategic” deals — transactions combining two or more competitors. The U.S. Department of Justice Antitrust Division (DOJ) and the Federal Trade Commission (FTC) have actively enforced the antitrust merger laws in the context of strategic PE deals, including by:
- requiring divestitures of assets or business lines to resolve competitive concerns;
- requiring firewalls or other conduct remedies for the same purpose; or
- filing a lawsuit seeking an injunction (after concluding the proposed remedies are insufficient).
Against this backdrop, in the last three months, two newly appointed FTC Commissioners have … Read more
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
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
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