The private equity industry has become the target of calls for more regulation, with critics and academics concerned that net asset values (NAVs) are inflated around periods of fundraising, particularly in the case of low-reputation funds. These calls are predicated on only one possible explanation for performance peaks at the time a new fund is raised: agency problems caused by strategic performance manipulation (see, e.g., Jenkinson, Sousa, and Stucke 2013, Barber and Yasuda 2017, Chakraborty and Ewens 2018, and Brown, Gredil, and Kaplan 2019). Yet there is an alternative explanation. Private equity fund managers can use the heterogeneity in performance … Read more
Both Glass, Lewis & Co. (“Glass Lewis”) and Institutional Shareholder Services Inc. (“ISS”), the leading providers of corporate governance and proxy advisory services, have now published their 2020 proxy voting guidelines. The Glass Lewis guidelines will take effect for meetings held on or after January 1, 2020, and the ISS guidelines will take effect for meetings held on or after February 1, 2020. Below is a summary of the key changes in the guidelines affecting U.S. companies.
Glass Lewis Voting Guidelines
Excluded Shareholder Proposals
In September 2019, the Securities and Exchange Commission (“SEC”) announced a new policy pursuant … Read more
On December 3, 2019, Japan’s Government Pension Fund (GPIF) announced that it would suspend share lending to short sellers. This is the latest development in a growing global regulatory skepticism of shorting, with Reuters recently reporting that short selling bans are under consideration in South Korea, Germany, France, Italy, and Turkey. Prominent short activists have characterized these regulatory efforts as a “war on truth,” calling themselves modern-day Davids fighting corporate Goliaths, powerful companies who commandeer protectionist instincts to shield local industry from legitimate criticism.
To be sure, a large academic literature has found that short selling improves price … Read more
The European Union has become more active in addressing EU common foreign and security policy (“CFSP”) objectives with the help of what it calls “restrictive measures,” i.e., EU Financial and Economic sanctions. As indicated in our recent client alert, The EU Introduces a New Sanctions Framework in Response to Cyber-Attack Threats and even more recent by introducing a framework for EU Financial Sanctions against Turkey, it has also specifically started to unilaterally implement sanctions addressing EU security concerns, including issues beyond traditional areas addressed by sanctions such as “traditional” sanctions imposed due to terrorism and international relations-based … Read more
One of the repercussions of the housing market collapse in the U.S. in 2007 was global anxiety about excess leverage, debt repayment, and overall credit conditions. Risk-pricing levels increased abruptly for highly indebted countries, making new borrowing to refinance debt increasingly difficult. Next year marks a decade since the eruption of the Eurozone sovereign debt crisis, when Greece, Italy, Ireland, Portugal, and Spain, known as the GIIPS countries, experienced an unprecedented rise in their borrowing rates.
For example, Greece and Ireland in 2010 ran an unprecedented peace-time deficit, reaching 15.8 percent and 32 percent of GDP, respectively. The Irish government … Read more
Financial reports can be opaque, complex, and difficult to understand. As far back as 1998, this was the premise behind the SEC’s Plain English Rule: an unsuccessful attempt to encourage firms to write more readable financial reports. In a new paper, we show that the turgid nature of financial reports could be an unintentional response to litigation risk. Indeed, firms’ concerns about satisfying disclosure requirements lead to more voluminous, and more complex, disclosures. We ensure that our results are well identified and take steps to mitigate endogeneity concerns.
What we investigate
We start with the observation that decreasing readability … Read more
On November 26, 2019, New York Stock Exchange LLC (“NYSE”) filed notice of a proposed rule change with the Securities and Exchange Commission to modify its listing rules relating to direct listings. The proposed rule change would allow companies to raise capital and sell new shares in a direct listing, in contrast to the current rules, which only permit secondary sales by existing shareholders. In addition, the proposed rule would modify the distribution requirements for direct listings, thereby expanding the number of private companies that would be eligible for direct listings. If adopted, the proposed rules would significantly increase the … Read more
In a new article, I use network theory to show that there is a hidden link between insider trading and macroeconomic risk. I suggest that current laws on insider trading increase the level of macroeconomic risk for the economy, and I show that this problem can be addressed by banning what I call network trades: trades based on private material information in firms that are connected to the firm of the insider (e.g. suppliers and competitors).
We live in an interconnected economy where private material information about one firm is also a relevant predictor of the performance of connected firms … Read more
For almost two years, Argentina has been facing a severe economic recession and has not had the ability to access international capital markets. This has been due to several factors, including a general capital flight from emerging markets following the U.S. Federal Reserve’s interest rate hikes throughout 2018, and the country’s persistent fiscal deficits and macroeconomic imbalances. The crisis moreover comes at a time when the risk of a global economic slowdown has sharply increased.
All of this has left Argentina vulnerable to a sovereign debt crisis. The president elect, Alberto Fernandez, has stated that once he takes office … Read more
The UK operates a voluntary merger control regime. In addition, the European Commission (EC) operates a ‘one-stop shop’ jurisdiction to review the largest and most complex cases on behalf of all EU Member States, including the UK. The combination of a voluntary UK regime and EC jurisdiction over major deals has resulted in the UK’s antitrust authority – the Competition and Markets Authority (CMA) – historically having a lower profile than many other major G20 enforcement authorities.
With Brexit now looming, however, the CMA is seeking to raise its global profile and to articulate … Read more
The United States pursues more successful corporate criminal enforcement actions against large multi-national firms than any other country, collecting enormous penalties and occupying center stage in the global enforcement arena. U.S. dominance draws its horsepower and its torque from two sources. The first, of course, is an extremely broad and easy to apply corporate liability rule: respondeat superior. Under this rule, corporations are liable for all crimes committed by their employees in the scope of employment with some intent to benefit the firm. The second is the power granted to prosecutors to negotiate and settle cases, most often through … Read more
Two recent Delaware decisions may give ammunition to stockholder plaintiffs seeking to assert claims against directors under a Caremark theory for failing to comply with their oversight obligations. The decisions—Marchand v. Barnhill (“Blue Bell”) and In re Clovis Oncology, Inc. Derivative Litigation—make clear that courts will not give business-judgment rule deference when presented with allegations that directors acted in bad faith by failing to implement or monitor systems of oversight. Although each case was before the courts on a motion to dismiss and therefore did not finally adjudicate the question of director liability, each decision undoubtedly … Read more
U.S. corporate law adopts a regulation-by-litigation model where the efficient balance between incentives and filters is essential for litigation to perform its function. In this model, over-litigation is not only a detrimental distortion but also a significant indication that the regulating mechanism is not efficiently working and that some corrective actions are required.
Given the dramatic increase in M&A litigation in recent years, culminating in 2014 with challenges to 95 percent of deals valued at more than $100 million, a correction was to a certain extent predictable. It came from the Delaware Court of Chancery in 2016 with In re … Read more
Auditors play a major role in corporate governance and capital markets. They facilitate firms’ access to financing by creating trust among public investors with efforts to prevent misbehavior and financial fraud by corporate insiders. In order to fulfill these goals, however, in addition to having the adequate knowledge and expertise, auditors should perform their functions in an independent manner. Unfortunately, auditors are subject to conflicts of interest by, for example, providing non-audit services or the mere fact of being hired and paid by the audited company. Therefore, even if auditors act independently, investors have reason to think otherwise. This lack … Read more
A recent decision by the Delaware Supreme Court, In re Investors Bancorp, Inc. Stockholder Litigation (“Investors Bancorp”), increased the risk of litigation against directors, bucking a decEdit visibilityades-long trend. The decision reversed a Chancery Court ruling and substantially changed the standard that Delaware courts use to review shareholder derivative litigation dealing with director equity grants (Skadden 2017). We use the decision to examine two related issues: (1) is litigation risk a material issue in the independent director employment market and (2) is there an optimal level of litigation risk as a corporate governance mechanism that … Read more
Following Corwin v. KKR Financial Holdings and other Delaware cases that have reinforced the standards that stockholder suits must meet to survive dismissal, would-be litigants have increasingly invoked Section 220 of the Delaware General Corporate Law (“Section 220”) to try to obtain corporate books and records in order to use those materials to bolster claims in subsequent litigation. In Donnelly v. Keryx Biopharmaceuticals, Inc., C.A. No. 2018-0892-SG (Del. Ch. Oct. 24, 2019), the Delaware Court of Chancery revisited the issue of what is a proper purpose under Section 220 and to what extent a stockholder’s purpose must match the … Read more
The growing compensation gap between CEOs and rank-and-file employees has generated considerable debate about potential adverse consequences at both the firm and societal levels. Despite interest in the topic, assessing vertical pay disparity has been difficult due to the lack of public disclosure about employee compensation.
While companies have long reported top-executive pay, transparency on employee compensation was recently enhanced when the SEC adopted the CEO Pay Ratio Rule requiring most reporting companies to provide new disclosures of the median employee’s pay and a ratio comparing the CEO’s compensation with this value. For example, if the CEO and median … Read more
In a recent paper, we use new and proprietary micro-data from company-ratings site Glassdoor for the period between 2008 and 2016 to investigate changes in employees’ perception of firms and managers during periods of financial misconduct and after the public announcement of the misconduct. Employee satisfaction is crucial for firm productivity and also serves as a proxy for a firm’s ability to attract and retain top talent. It is reasonable to expect that public announcement of financial misconduct by a firm would have a negative effect on its employees’ perceptions of the firm. Moreover, employees, as insiders, may observe nonpublic … Read more
M&A activity in the U.S. and worldwide was mixed in October. The number of deals continued to fall with a decline of 11.2% in the U.S., to 744, and of 8.1% globally, to 2,708. At the same time, total deal value rose by 37.5% in the U.S., to $99.29 billion, and by 47.2% globally, to $282.72 billion. Average deal value also increased by 54.8% in the U.S., to $133.5 million, and by 60.2% globally, to $104.4 million. Figure 1.
Strategic vs. Sponsor Activity
The number of strategic deals decreased in the U.S. by 15.6% to 583 and globally … Read more
This post lays out a new approach to shareholder voting designed to increase the voting power of long-term committed shareholders: adding votes to shares based on both long holding periods and high concentrations. Called quality voting, the approach would give more votes to corporate shares held in large amounts for long periods. Quality voting should be far less controversial than dual class share structures and would avoid the drawbacks of time-weighted plans.
The standard default voting rule in U.S. corporations is one share, one vote. Although manifestly democratic, it is neither inevitable nor mandatory. One of the most prominent … Read more
On November 4, the Securities and Exchange Commission (the “SEC”) proposed amendments (the “Proposal”) to modernize Rule 206(4)-1 (the “Advertising Rule”) under the Investment Advisers Act of 1940 (the “Advisers Act”).  The first substantial amendment to the Advertising Rule since its adoption in 1961, the Proposal is intended to reflect “changes in the technology used for communication, the expectations of investors shopping for advisory services, and the nature of the investment advisory industry, including the types of investors seeking and receiving investment advisory services.”
While the Proposal appears to be designed to provide investment advisers, particularly private fund managers, … Read more
Class action reform could take a lesson from U.S. public company governance, I argue in a new working paper, available here.
Class actions and public companies have a lot in common. Class action scholars routinely explain problems in class action litigation, such as excessive attorneys’ fees and settlements that shortchange the class, as “agency costs.” Corporate law scholars frame the problems that beset the governance of U.S. public companies in the same terms. It is also the case that the agency relationship between class counsel and class members looks similar to that between executives and shareholders in U.S. … Read more
Breach of the duty of oversight claims against Delaware directors are known as “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” The plaintiff must successfully argue that the directors either “utterly failed to implement any reporting or information system or controls” or “having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.” These “Caremark claims”—named after the Court of Chancery’s seminal decision in this area, In re Caremark International … Read more
Professor John C. Coffee, Jr., of Columbia Law School and Commissioner Robert J. Jackson, Jr., of the U.S. Securities and Exchange Commission discuss proxy solicitation rules, short-selling issues, and other hot topics of debate at the SEC.
This podcast was produced by John Metaxas, Columbia Law ’84, WallStreetNorth Communications, Inc.… Read more
On October 9, 2019, the US Department of the Treasury (Treasury Department) issued proposed regulations (Proposed Regulations) regarding tax issues relating to the anticipated discontinuance of the London interbank rate (LIBOR) after the 2021 calendar year. The Proposed Regulations are taxpayer-friendly and intended to prevent disruptions in the financial market.
LIBOR has been extensively used as an interest rate benchmark in debt instruments (such as loan agreements and bonds) and other financial instruments (such as swaps and other derivatives). In July 2017, the UK regulator tasked with overseeing LIBOR announced that it can only commit to sustain LIBOR until … Read more
The validity of whistleblower reports based on secondhand information has been called into question by President Trump:
A whistleblower with second hand information? Another Fake News Story! See what was said on the very nice, no pressure, call. Another Witch Hunt!—President Donald J. Trump Twitter @realDonaldTrump
The Inspector General of the Intelligence Community (ICIG) seemed to hold a similar view of secondhand reports. An earlier version of ICIG Form 401 stated ICIG protocol as:
FIRST-HAND INFORMATION REQUIRED. In order to find an urgent concern ‘credible,’ the ICIG must be in possession of reliable, first-hand information. The ICIG cannot transmit … Read more
In a recent article, I highlight the links among initial coin offerings (ICOs), cryptocurrencies, stablecoins, and central bank digital currencies (CBDCs). Although these entities exist in different contexts (securities law and capital formation, payment systems, monetary policy), they are intertwined and share an evolutionary process.
ICOs raise issues related to securities law because digital tokens are tokenized equities and, therefore, securities. At the same time, they have increased the amount of outstanding cryptocurrencies and, as a result, highlighted the problems generally associated with money, in the context of cryptocurrencies.
Cryptocurrencies, including Bitcoin, have suffered tremendous volatility, impairing their role as … Read more
Proxy advisory firms Institutional Shareholder Services (ISS) and Glass Lewis recently announced updates to their U.S. proxy voting policies for the 2020 proxy season. ISS’s new policies will apply to shareholder meetings held on or after February 1, 2020 and Glass Lewis’s new policies will apply to meetings that are held on or after January 1, 2020.
ISS Benchmark Policy Changes. ISS had previously released draft proposals on several of the proposed changes in October. Changes to non-U.S. voting policies covering Europe, the Middle East and Africa, and Asia have also been announced. Notable updates to ISS’s U.S. voting … Read more
Recent regulatory reforms in advanced economies have empowered shareholders by letting them vote on executive compensation, corporate transactions, changes to the corporate charter, and social and environmental proposals. This shift of power from boards to shareholders assumes that shareholder voting increases welfare and firm valuations. It applies the logic of political democracy and takes for granted that aligning the preferences of those who make decisions with those for whom decisions are made – a form of corporate democracy – is optimal.
In our paper, Trading and Shareholder Voting, we question this argument. The corporate setting is very different from … Read more
On November 5, 2019, at an open meeting the SEC voted (3 to 2) to propose amendments to the proxy rules. The proposed amendments relate to regulating proxy advisory firms. The Commission also voted to propose amendments with regard to shareholder proposals, including eligibility standards for submission and resubmission. Chairman Jay Clayton observed that the proposals were “rooted in two essential aspects of effective regulation: modernization and retrospective review.”
The SEC is soliciting public comment, through numerous questions in both proposals covering a range of topics and alternatives, for 60 days after their publication in the Federal Register.
… Read more
Common ownership – the phenomenon of firms sharing stockholders with industry competitors – is becoming ubiquitous, with 82 percent of S&P 500 firms having common ownership at the end of 2015 compared with just 17 percent in 1990.
At least in theory, a cross-owner has incentives to reduce competition among its portfolio companies because doing so may boost their earnings (likely at the cost of consumers or other companies). For example, common ownership within the finance industry has been found to reduce interest rates that savers receive on their deposits, while common ownership between airline companies tends to raise air … Read more
Shareholder proposals urging corporate boards to report on climate‑related risk made headlines in 2017 when they earned majority support from investors at ExxonMobil, Occidental Petroleum, and PPL. The key to this historic vote was the support of the Big Three index fund managers – BlackRock, State Street, and Vanguard, which broke with management and cast their votes for the proposals. The 2018 proxy season saw several more climate‑related proposals earn majority support, and in 2018 and 2019 record numbers of proposals were withdrawn after the companies agreed to respond to shareholders’ requests.
The highly visible 2017 proposal, … Read more
Over the past half dozen years, the three of us have written a number of papers on sovereign bond contracts. In the first set of papers, we documented the stickiness phenomenon (the reluctance of lawyers to modify standard contract language even though obsolescence posed a significant risk of misinterpretation). In the second set of papers, we studied the phenomenon of random mutations to the standard form language that occurred without an apparent rational purpose (here, here, and here). Both findings seemed completely at odds with the standard account of how sophisticated lawyers drafted multi-billion dollar financial … Read more
In response to the sharp increase in campaigns by activist hedge funds in France and Europe generally, a French commission has conducted an extensive investigation and issued a carefully researched, reasonable and balanced report recommending regulatory and procedural changes to rebalance the relationship between companies and activists. The key recommendations are:
- “[S]tronger transparency measures applicable to investors taking public positions, directly or indirectly, aimed at influencing an issuer’s strategy, financial position or governance. An activist taking a public position should disclose, inter alia, the number of shares and voting rights and the type of securities held in the issuer,
… Read more
Most everyone has had their say about the collapse of WeWork’s failed initial public offering (“IPO”). Clearly, this failure was overdetermined, as many competing causes can explain it, including: (1) the extraordinary level of self-dealing that its CEO, Adam Neumann, regularly engaged in; (2) the corporate governance structure that locked up all voting power and control in him; (3) a system of non-GAAP metrics that more than raised eyebrows; (4) an extraordinarily high valuation for a company that, despite its claims of being a high-tech start-up, was closer to a simple real estate firm; and (5) the unstable personality … Read more