Businesses often face criticism for putting profit over people and for sometimes ignoring the needs of various stakeholders, including employees and communities. This reality has led to a variety of efforts, including the corporate social responsibility movement, seeking to encourage more socially conscious business practices. These are worthy goals that have seen only modest success, and there are indications that things are not likely to get better if we stay on the current path.
There are two factors working together that could derail efforts to support large-scale socially responsible business decisions: (1) the emergence of social enterprise-enabling statutes and (2) … Read more
Since the Delaware Supreme Court issued its landmark Dell appraisal decision in December 2017, the Delaware courts have issued three appraisal decisions—Verition Partners v. Aruba Networks (Feb. 15, 2018), In re Appraisal of AOL Inc. (Feb. 23, 2018), and In re Appraisal of SWS Group (affirmed by the Delaware Supreme Court Feb. 23, 2018). In Dell, the Supreme Court held that, in the case of an arm’s-length merger with a “robust” sale process, the deal price is generally the best “proxy” for appraised fair value and should be given “heavy, if not determinative weight” in determining fair value. … Read more
The news that a whistleblower contacted U.S. regulators last month about alleged manipulation of the Chicago Board Options Exchange Volatility Index, or VIX, highlights near universal reliance on information that stock market indices provide. While the VIX is not itself a stock market index – it is constructed from the implied volatility of S&P 500 index options – the fact that it is designed to track the expected volatility of another index only reinforces the centrality of indices in the modern economy. Other uses of stock market indices abound: Investors rely on them to evaluate the returns on their investment … Read more
On March 1, 2018, Overstock.com disclosed that its ongoing $250 million initial coin offering has been under investigation by the U.S. Securities and Exchange Commission since February.1 The investigation appears to be part of a widespread probe pursuant to which “scores” of companies and advisers in the ICO industry have reportedly received subpoenas and requests seeking information from numerous SEC regional offices relating to the structure and marketing of the offerings.2 This initiative suggests the onset of a broad regulatory push to rein in the burgeoning ICO market after a series of “warning shots” in the form of … Read more
Firms faced with a class action lawsuit experience reputational and financial penalties.  However, research has focused solely on the consequences for the defendant and, to our knowledge, no studies have examined whether the repercussions of alleged malfeasance range beyond the company sued. Thus, it remains unexplored whether litigation risks extend beyond the sued firm and whether there are spillover risks associated with doing business with that firm.
Prior research has found that corporate culture, governance practices, and even bankruptcy risks extend beyond the traditional boundaries of firms that share directors or are linked with business partners through contracts. In … Read more
Despite an increase in M&A activity over the past three months, deal trends in February 2018 retreated towards their 12-month averages, following banner months in November and December, both of which featured some of the largest deals we have seen in the last year. In the U.S., deal volume by dollar value decreased by 52.1% to $82.61 billion, the second-lowest level of the preceding 12‑month period, and the number of deals decreased by 21.5% to 716. Globally, deal volume decreased by 10.5% to $295.03 billion and the number of deals decreased by 20.1% to 2,639 (a 12-month low).
… Read more
Securities class actions soared in 2017, jumping from 271 filings in 2016 to a near record 412 filings in 2017 — well above the average of 193 per year for the years 1997 to 2016. Only 2001 was comparable, although both 2001 and 2017 were inflated by special factors. Now add to this growth the $3 billion settlement in the Petrobras litigation earlier this year (plus the highly favorable ruling by the Second Circuit in Petrobras last year). The result may be the same as when the discovery of gold at Sutter’s Mill was announced to the … Read more
The SEC continues to send messages to the nascent cryptocurrency market. The agency has recently brought enforcement actions and issued a public statement that illustrate the agency’s views on how the federal securities laws apply to crypto or digital asset trading platforms. In the latest enforcement action, the SEC in U.S. District Court, Southern District of New York alleging that a bitcoin trading platform functioned as an unregistered exchange, facilitated unregistered offerings and trading of securities, and defrauded investors by failing to disclose a cyberattack on the platform. The SEC’s Divisions of Enforcement and Trading and Markets also issued … Read more
Central bank law is an unloved part of public law. Maybe that’s because commercial litigators cannot sue central banks, advise the people that sell bonds to them, or argue cases in front of the U.S. Supreme Court to create new doctrines of central bank policy. Yet, new empirical studies may cast light on this unloved sector while pleasing economists eager to put in place something called nominal GDP targeting.
In our recent article, we discuss how to legally authorize central banks to buy private securities like corporate stocks and bonds. We find that the easiest way is to make … Read more
VUCA is an acronym for volatility, uncertainty, complexity, and ambiguity – four dimensions of risk – and a tool that can used to better manage legal risk. Designed by the U.S. military and reinforced by business, it describes an environment that is so continuously buffeted by legal, social, and economic risks that it’s persistently at the edge of chaos. Threats are uncertain and diffuse and conflict is inherent and unpredictable.
In a new paper, available here, I show how firms can respond to legal VUCA in order to capture value and manage risk. In this post, I first … Read more
In a December 19, 2017, decision, In re Investors Bancorp, Inc. Stockholder Litigation, No. 169, 2017 (Del. Dec. 19, 2017), the Supreme Court of the State of Delaware considered the limits of a stockholder ratification defense when directors make equity awards to themselves under an equity incentive plan or “EIP.” Justice Collins J. Seitz, Jr. wrote for a unanimous court that when “stockholders did not ratify the specific awards the directors made under the EIP,” and instead ratified only “general parameters” for director compensation, the proper standard for review of those awards is entire fairness. As the Supreme Court … Read more
One of the most disputed policy initiatives of the Obama administration was the Department of Labor’s fiduciary rule, which subjects brokers and other financial professionals managing retirement accounts to a fiduciary duty to avoid conflicts and act in the best interest of investors. Functionally, the rule mandates a drastic change to how brokers are compensated. The rule has been enormously controversial, garnering thousands of comments, subjected to days of hearings, and spawning hundreds of pages of news articles and commentaries. The Trump administration has halted enforcement of the rule for 18 months to review its effects, and its future remains … Read more
In February, the U.S. Department of Justice intervened in United States ex rel. Medrano Diabetic Care RX, LLC, No. 15 Civ. 62617 (S.D. Fla.), a False Claims Act case involving alleged healthcare fraud. The complaint in intervention asserted claims against a compounding pharmacy, its executives and, notably, the manager of a private equity fund that owned the pharmacy. While the activities of the private equity manager in the case were particularly intertwined with those of the portfolio company, much of the conduct cited is not atypical for private equity firms. The DOJ’s decision to intervene signals a possibly more … Read more
Scholars, lawyers, judges, and policymakers frequently need to compare corporate laws, both internationally and domestically. In part, this need results from the internal affairs doctrine, a conflict-of-laws rule that is unique to corporate law. The doctrine requires that courts apply the corporate law of the state or country of incorporation to the corporation’s internal affairs. Because corporations can easily and inexpensively incorporate anywhere—regardless of the locations of their headquarters or operations—the internal affairs doctrine enables them to pick their governing laws from an almost worldwide menu. The result is that even many corporations operating solely in the United States are … Read more
On January 29, 2018, the Federal Reserve and the FDIC (the “Agencies”) released feedback letters to 19 foreign banking organizations (“FBOs”) that last filed plans by December 31, 2015 (the “FBO Feedback”). The most significant take‑away is that the resolution planning requirements for these FBOs have been substantially reduced from those previously requiredOK. Many of the FBOs now are permitted to file reduced or more limited plans by incorporating by reference information from their prior plans and by addressing more streamlined requirements in other areas. The FBOs must file their next … Read more
An important and long-standing question in the economics of information is whether voluntary disclosure leads to full disclosure. A compelling and intuitive argument, often described as the “unraveling” argument (see Milgrom, 1981), suggests that the answer is, yes. In brief, the argument is that the firm, or more generally the “sender,” with the most favorable information will voluntarily disclose. So the audience for the disclosure—the “receiver”—will interpret non-disclosure as indicating that the firm does not have the most favorable information. But given this, the firm with the second most favorable information will disclose, and so on. All the firms thus … Read more
On February 27, 2018, the U.S. Supreme Court issued a decision in Merit Management Group, LP v. FTI Consulting, Inc. (No. 16-784), settling a circuit split regarding the “safe harbor” provision in § 546(e) of the Bankruptcy Code. That section bars the avoidance of certain types of securities and commodities transactions that are made by, to or for the benefit of covered entities including financial institutions, stockbrokers and securities clearing agencies.
Circuits had split regarding whether the safe harbor protects a transfer that passes through a covered entity, where the entity only acts as a conduit and has no beneficial … Read more
I’ve had the honor of serving as a commissioner of the SEC for just over a month now— and I’ve learned a lot in that time, mostly from the outstanding staff. I’ve been schooled about cryptocurrency, spent hours wading through enforcement recommendations, and have been left in awe of the breadth of knowledge and expertise across our agency.
One thing that I always tried to bring to my work as an academic, and that I now hope to bring to my work as a policy-maker, is a focus on data and facts. Numbers are powerful things. A well-placed statistic can … Read more
Watch lawyers, scholars, and a federal judge discuss the thorny issues involved in settling the high-profile class action filed by former players against the pro football league. John C. Coffee, Jr., the Adolf A. Berle Professor of Law at Columbia Law School, organized and moderated a panel that included: Lee H. Rosenthal, Chief Judge of the U.S. District Court in the Southern District of Texas; Elizabeth Cabraser, name partner at Lieff, Cabraser, Heimann & Bernstein LLP; Samuel Issacharoff, the Bonnie & Richard Reiss Professor of Constitutional Law at New York University Law School; Brad S. Karp, chairman of Paul, Weiss, … Read more
Ronald Coase (1959, 1960)  insightfully noted that with well-defined property rights, resources flow to their highest-valued use. In a recent paper, we apply this view of property rights to the corporate takeover market in the United States. Observers such as Jensen (1993) argue that the major corporate-control activity beginning in the 1980s in the United States emanated from political, economic, and technological shocks that upset the existing structure of American industry. Indeed, innovations in junk bond financing and the relaxation of antitrust laws made large firms targets of corporate takeovers for the first time. In our analysis, … Read more
Late last year, the SEC’s Division of Corporation Finance issued a no-action letter in which it agreed that a proposal seeking to lower the threshold for calling a special meeting from 25 percent to 10 percent of the outstanding shares directly conflicted with a company proposal to ratify its existing bylaw with the 25 percent threshold. The AES Corporation, December 19, 2017. In the staff’s view, a reasonable shareholder could not logically vote in favor of both proposals, which is the standard it enunciated for Rule 14a-8(i)(9) in Staff Legal Bulletin 14H issued in October 2015. The letter was … Read more
We investigate Chinese firms’ use of variable interest entities (VIEs) to evade Chinese regulation on foreign ownership and list in the U.S. We find that the use of VIEs for such ends is widespread, growing, and associated with valuation discounts of as much as 30 percent relative to Chinese non-VIE firms listed in the U.S. The discount varies predictably with events that change the risk of government intervention and managerial malfeasance, and is tempered by better oversight and lower regulatory risk. To protect shareholders, VIE firms are more likely to have these characteristics as well as to curry government favor … Read more
Antitrust merger enforcement historically has focused on horizontal mergers — consolidation of two firms that compete directly in the same space. This is especially true in the U.S., where antitrust authorities have challenged few vertical mergers — those of a firm with one of its customers or suppliers — and are even less prone to scrutinize conglomerate mergers that marry complementary assets, or transactions that may affect innovation competition that isn’t tied to specific products or markets.
The European Union’s antitrust regulator, the European Commission, has been more apt to examine vertical issues, conglomerate effects and innovation competition, pushing the … Read more
In 2011, the Securities and Exchange Commission (SEC) introduced a Whistleblower (WB) program as part of the Dodd-Frank Act to protect investors through greater deterrence of securities law violations and more effective enforcement. The program offers financial incentives to provide original information that leads to a successful enforcement action. SEC officials have called the program a “game changer,” improving their ability to detect illegal conduct and speed investigations with fewer resources. Since the program’s introduction, the SEC has received over 18,000 tips, with the highest number coming in three categories: corporate disclosures and financials (financial reporting fraud); Ponzi schemes … Read more
Investigations into potential violations of U.S. and non-U.S. securities laws are often resolved by a settlement requiring the business to make one or more large settlement payments. We have seen settlements paid to the DOJ, the SEC, other U.S. and non-U.S. regulators, and private plaintiffs. An important question is whether the payment will be deductible for tax purposes. Since 1969, the U.S. tax law has denied a deduction for “any fine or similar penalty paid to a government for the violation of any law.” This limitation was significantly changed by the U.S. tax reform law enacted in December of … Read more
Professor Donald Langevoort of Georgetown Law speaks with Reynolds Holding about how two duties — the obligation to disclose or abstain from trading on material information and the duty to reveal corporate secrets — evolved from the Second Circuit’s Texas Gulf Sulphur decision in 1968 to the Supreme Court’s Chiarella ruling in 1980. Langevoort also explains how explosions and other disasters highlight the dangers of making even innocuous prior statements. Click on “read more” for a link to the conversation on the Blue Sky Banter podcast.
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A recent spate of appraisal decisions signals that the Delaware courts will be skeptical of claims that the “fair value” of a company’s stock, as determined in a judicial proceeding brought by a dissenter from the merger, will be higher than the price paid in the transaction. To the contrary, in the context of strategic transactions—which may include synergy value to which dissenting stockholders are not entitled under the appraisal statute—Delaware has made clear that the appraised value may well be less than the deal price.
These decisions follow the important and welcome rulings of the Delaware Supreme Court in … Read more
If all goes well with its February 28 filing with the Securities and Exchange Commission, Spotify will be the first firm to go public in the U.S. via a direct listing on a stock exchange. Simply put, this means that, rather than first selling a typical 10 percent to 30 percent of its shares outstanding to the general public (at a heavily discounted offering price), Spotify will immediately begin trading on the New York Stock Exchange. Up to $1 billion worth of shares will be supplied by existing shareholders of the firm and sold in the open market to new … Read more
In 2015, Hewlett Packard acquired Aruba for a negotiated price of $24.67 per share, or about $2.8 billion. Several stockholders sought appraisal. On February 15, the Delaware Court of Chancery found that, for purposes of appraisal, the fair value of the Aruba shares equaled the 30-day average unaffected market price of the shares, prior to announcement of the transaction, which was $17.13, about 30% less than the negotiated price.
The court’s reasoning was driven largely by what the court believed to be directions from the Delaware Supreme Court’s decisions arising from the earlier DFC and Dell acquisitions, including assumptions regarding … Read more
In U.S. and global M&A activity for January 2018, total deal volume by dollar value decreased, while the total number of deals increased. In the U.S., deal volume decreased by 29.3% to $170.57 billion, while the number of deals increased by 42.6% to 884. Globally, deal volume decreased by 31.2% to $324.45 billion, while the number of deals increased by 9.9% to 3,118. The sharp decreases in deal volumes are likely less reflective of any dramatic decline in deal flow, but rather due to the 12-month highs set in December 2017, especially given that January 2018 marked the third-highest global … Read more
In a typical public company, shareholders can elect the board, appoint the auditors, and approve fundamental changes. In other words, they can participate in the governance of the firm. Firms with dual class shares (DCS) alter this balance by inviting the subordinate shareholders to carry the financial risk of investing in the firm without providing them with the corresponding power to elect the board and exercise other voting rights. I argue that this misalignment of rights and risks should be subject to three modest reforms in order to enhance governance in DCS firms.
The rationale underlying DCS is that they … Read more
Today [February 24, 2018] is a special day for the [Securities and Exchange Commission’s] Office of the Investor Advocate. I started this job four years ago today, and because I am the first Investor Advocate that is also the day the Office of the Investor Advocate came into existence. During the past four years, through the efforts of the talented and dedicated individuals who have joined my Office and work so hard to advocate for investors, we have helped to elevate the Commission’s thinking about the needs of today’s investors. And we continue to make progress in some important … Read more
Limited liability companies, or LLCs, have emerged as the entity of choice for new businesses. The form attracts many everyday owners and entrepreneurs as an easy way to combine corporation-style limited liability protection with partnership-style tax treatment. LLCs also offer an appealing means for sophisticated players to craft more flexible internal governance arrangements without fiduciary duties and other governance terms required of other organizational forms. LLCs thus cater to two very different groups: average investors, and very sophisticated parties. Unfortunately, as LLCs have grown in popularity, so too have the stress fractures that result from satisfying these two divergent groups. … Read more
Courts in many countries, including the U.S., generally enforce contracts with clauses specifying international arbitration as the preferred avenue for resolving disputes. Accordingly, when drafting such provisions, due consideration must be placed on ensuring that such clauses are drafted to fully reflect the parties’ desires.
In addition to clarifying what kinds of disputes are to be arbitrated and which institutional rules (if any) will govern the proceedings, any agreement between two parties also should identify where the arbitration proceedings are to take place. Many clauses simply state that all disputes will be arbitrated in a single location (commonly New York, … Read more
For the past 40 years, U.S. antitrust law has been understood as a consumer welfare prescription against conduct leading to higher prices, reduced output, and lower quality or innovation. A growing number of commentators argue, however, that this understanding of antitrust law should expand to include social or political goals to counter the ills of what some have termed a “New Gilded Age.” Just as the Sherman Act was needed to address the common law’s failure to curb the concentration of economic power resulting from business trusts and predatory practices, a new enforcement regime may be needed to replace … Read more
In Miller v. HCP (Feb. 1, 2018), the Court of Chancery dismissed claims made against the members of a limited liability company board, a majority of whom had been appointed by the private equity firm that was the company’s controlling stockholder, for approving a sale of the company to an unaffiliated third party that was championed by the controller—without attempting to maximize the price.
Under the LLC operating agreement’s “waterfall” provisions governing the allocation of proceeds on a sale of the company, the controller was entitled to receive almost all of the proceeds of any sale up to $30 million … Read more
There is an extensive literature on the benefits of mandatory disclosure by firms, but measuring the costs of such disclosure has been more challenging (Leuz and Wysocki 2016). In particular, while some believe that mandatory disclosure could increase litigation against firms (e.g. Coates and Srinivasan 2014), few papers find such evidence. We use proprietary directors’ and officers’ (D&O) insurance data and a natural experiment based on inter-state variation in disclosure regulation to examine this question. Specifically, state law requires that firms incorporated in New York disclose D&O insurance premiums. We examine whether D&O insurance premiums for New York and non-New … Read more
When Michael Cohen, President Donald Trump’s personal lawyer, acknowledged paying $130,000 of his own money to Stephanie Clifford (aka Stormy Daniels), the porn star who once claimed to have had an affair with Trump, Clifford’s lawyer announced that Cohen had breached their confidentiality agreement and therefore Clifford was now free to tell her story. Maybe. But simply acknowledging the existence of the agreement cannot be a breach. It is far from clear that Cohen’s statements about the agreement revealed enough to support the argument that he had breached.
But suppose we concede that Cohen had not breached. Must Clifford remain … Read more
The U.S. high-yield and investment-grade debt markets saw significant increases in 2017 over 2016 in dollar volume and number of issuances. The U.S. equity indices reached new highs throughout the year, with the Standard & Poor’s 500 index ending the year up 19.4 percent.
The slow, steady expansion of the economy (one of the longest expansion cycles on record) and the current favorable market conditions, along with the recently enacted reduction in corporate taxes — which could drive earnings expansion — have fueled optimism for robust capital markets activity in 2018. Questions linger, however, about the sustainability of the … Read more
Several major corporate scandals in the United States during the early 2000s brought attention to corporate governance of large U.S. companies. As a result, Congress passed the Sarbanes-Oxley Act (SOX), and the Securities and Exchange Commission (SEC) announced several regulations aimed at restoring public confidence in the governance of public corporations. While significant research has been conducted on the relation between corporate governance and firm performance, there is no agreement yet on whether changes in governance structure are beneficial for companies and improve firm performance, especially when the changes are dictated by regulation.
The main question is whether mandatory rather … Read more
The trend of increased securities class action filings in federal courts continued from 2016 to 2017. Federal court filings of class actions related to M&A transactions again contributed to the increase. Foreign issuers remained frequent targets of federal securities class actions.
In 2017, the federal courts issued a number of important securities law decisions. Addressing the application of statutory time-bars applicable to securities law violations, the Supreme Court ruled in CalPERS that the Securities Act’s repose period is not subject to class action tolling and held in Kokesh that disgorgement in SEC proceedings is subject to the … Read more
Corporate governance has traditionally been viewed as a way to reduce agency costs between shareholders and managers in the context of private ordering. Laws and regulations pertaining to corporate governance have, therefore, typically aimed to enhance long-term wealth for shareholders.
Governments have in recent years, however, discovered a new use for corporate governance: advancing the public interest. This has been done by promoting everything from environmental causes to gender diversity to humanitarian aid. In the United Kingdom, the government has been explicit in advocating this view of corporate governance. Prime Minister Theresa May has expressly noted that corporate governance should … Read more
Columbia Law School and Columbia Business School’s Program in the Law and Economics of Capital Markets is now accepting applications for their Post-Doctoral Research Fellow. This position is intended for a person who expects to begin a law school teaching career at the start of the 2020-21 academic year and who desires an interim position that would help the person prepare for such a career by offering the time and facilities needed to do serious research and to develop further expertise. A candidate should have an exceptional academic record from a major law school and have at least three years … Read more