If a party obtains information about a public firm before its initial public offering (IPO), and the party themselves is not an insider of the firm, should they be allowed to profit from the information after the IPO? We investigate this question in our research paper, “Outside Insiders: Do Limited Partners Obtain Valuable Information about Stocks Backed by their Venture Capital Funds?” As the title implies, we find that this situation can occur when the IPO is backed by a Venture Capitalist (VC).
Venture Capital backed IPOs account for more than half of all IPOs. In the years … Read more
Many public companies continue to consider their options in responding to proxy access shareholder proposals following the Division of Corporate Finance’s unusual announcement that it will not opine on “the application of Rule 14a-8(i)(9) during the current proxy season.” But over the last few days, several companies have made notable decisions. Whole Foods Market, Inc., which had led the charge earlier this proxy season by obtaining no-action relief from the Securities and Exchange Commission (“SEC”) on the ground that it was planning to submit a conflicting management proposal to shareholders, announced on February 13 that it has decided to … Read more
On February 9, 2015, the U.S. Securities and Exchange Commission (SEC) issued a proposed rule related to the disclosure of hedging policies applicable to board members, officers, and other employees. The proposed rule would implement one of the remaining requirements adopted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
The proposed rule would amend Item 407 of Regulation S-K to require companies to disclose whether they permit directors, officers, and other employees to hedge the company’s securities, including any equity securities of the company’s parent, subsidiaries, or any subsidiary of any parent of … Read more
The SEC staff issued a no-action letter recently that will allow some companies to refinance their debt using tender and exchange offers shorter than the 20 business days required in the tender offer rules. The letter extends to high yield debt tender offers and to exchange offers pre‑existing guidance that allowed shorter tender offers for investment grade debt. The letter also imposes a number of new limitations on and requirements for shorter tender offers.
The no‑action letter—Abbreviated Tender or Exchange Offers for Non‑Convertible Debt Securities, January 23, 2015—supersedes prior no‑action letters for tender offers launched after its date.… Read more
A nuance in margin rules proposed by the CFTC and other federal financial regulators threatens to undermine a carefully struck balance in Dodd-Frank. As background, Title VII of Dodd-Frank subjected U.S. derivatives markets to a host of new regulations. Broadly speaking, regulations promulgated by the CFTC under Title VII require that certain types of swaps be centrally cleared through a clearinghouse and a subset of those swaps be executed on a swap execution facility (SEF) or designated contract market (DCM). The clearing mandate helps mitigate credit risk in the derivatives market through interposing the credit … Read more
Recent Delaware decisions have reinforced the expansive power and authority of a board to adopt and enforce corporate bylaws. Advance notice bylaws have become commonplace; exclusive forum bylaws are becoming more prevalent; and adoption of fee shifting bylaws generally awaits action by the Delaware legislature, which is expected in the upcoming 2015 session.
Exclusive Forum Bylaws
An exclusive forum bylaw typically requires that intra-corporate litigation (such as stockholder suits) be brought only in the courts of a specified state (generally where the corporation is incorporated, and sometimes where it is headquartered). The purpose is to increase the predictability and efficiency … Read more
The following post is taken from an address by CFTC Commissioner J. Christopher Giancarlo before the ABA Business Law Section, Derivatives & Futures Law Committee Winter Meeting and is dated January 23, 2015. Commissioner Giancarlo’s address may be accessed here.
Thank you for the kind introduction.
Let me begin with the disclaimer that my remarks today reflect my own views and do not necessarily reflect the views of the Commodity Futures Trading Commission (CFTC or Commission), my fellow Commissioners or the CFTC staff.
It is an honor to speak to you today. I see so many truly distinguished members … Read more
Earlier this month, federal district Judge Richard J. Leon rejected outright a deferred prosecution agreement with a company, “looking at the DPA in its totality,” and noting that not only were “no individuals . . . being prosecuted for their conduct at issue here” but also “a number of the employees who were directly involved in the transactions are being allowed to remain with the company.” No federal judge has done such a thing before. But Judge Leon’s ruling may only be the beginning, if the practice of charging companies and not individuals continues without real reforms.
A corporate criminal … Read more
In December 2013, the SEC at the direction of Congress under the JOBS Act dutifully provided an initial SEC staff report addressing securities disclosure requirements for public companies to question whether the SEC’s detailed disclosure mandates for public company disclosure might be improved or simplified for the benefit of investors. In late 2014, the SEC’s Division of Corporate Finance sought lawyerly input, and heading into 2015, the SEC is methodically continuing this project, seeking comments and reviewing their own rules internally. Before plodding towards even more disclosure minutia read only by lawyers, we might question, is any of this carefully … Read more
An SEC cybersecurity sweep examination by the SEC’s Office of Compliance Inspections and Examinations (OCIE) found that 88 percent of the broker-dealers (BDs) and 74 percent of the registered investment advisers (RIAs) they visited experienced cyber-attacks directly or indirectly through vendors, the SEC reported in a February 3, 2015 Risk Alert.
The sweep found that while the vast majority of all BDs and RIAs have adopted written information security policies, the SEC staff found some gaps in cybersecurity protection among many firms. BDs and RIAs will find the report useful reading to help them learn how they compare to their … Read more
Today we feature three posts on the theme of Fannie Mae and Freddie Mac. The first two posts — from David Min and Brad Miller, respectively — question assumptions about the proper role of government and markets in home mortgage securitization markets, arguing for restraint in privatization. The third post, from Mark A. Calabria, looks to the conservatorships of Fannie Mae and Freddie Mac to draw lessons as to whether tools for resolution introduced by the Dodd-Frank Act are likely to be used in the event a major financial institution suffers distress. All of these posts are based … Read more
I want to make the argument that government-backed securitization—i.e., something approximating the core functions and parameters of the much-maligned government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac—is necessary and prudent for the future of housing finance reform. To do so, I want to convince you of three propositions that I think are clearly correct and have not been widely acknowledged. These arguments, with a large amount of additional supporting evidence, are fleshed out in much greater detail here.
First, the federal government’s high degree of involvement in housing finance is neither a recent nor unique phenomenon. Since the New … Read more
The debate over housing finance is odd even by the current standards of political debate in Washington, which sets a high bar.
Proposals to limit government involvement in housing finance have nothing to do with the failings of the system, and certainly nothing to do with what went wrong in the financial crisis. The proposals are born of self-interest, dogma, self-interest masked as dogma, or perhaps political reality, but certainly not experience.
Fannie and Freddie were shareholder-owned corporations run for a profit when they came to grief and entered federal conservatorship. The two companies began, however, as government agencies that … Read more
There was perhaps no issue of greater importance to the financial regulatory reforms of 2010 than the resolution, without taxpayer assistance, of large financial institutions. The rescue of firms such as AIG shocked the public conscience and provided the political force behind the passage of the Dodd-Frank Act. The force is reflected in the fact that Titles I and II of Dodd-Frank relate to the identification and resolution of large financial entities, and Title VIII relates to the resolution of financial market utilities. How the tools established in Titles I, II and VIII are implemented is paramount to the success … Read more
The US economy has been one of the most dynamic economies in the world but recent research suggests that US dynamism is in decline. The startup, job creation, and job destruction rates have all declined over the past three decades with a possible increase in the rate of decline in the past decade. The dynamism decline is robust, appearing in a variety of data. Moreover because startups and the movement of resources from low to high productivity firms are closely associated with improvements in productivity, the decline of dynamism may reduce real wages and the standard of living.
Could … Read more
In Marblegate Asset Management v. Education Management Corp. (S.D.N.Y. 2014), the Southern District of New York found that a proposed out-of-court debt restructuring to the detriment of non-consenting creditors likely violated provisions of the Trust Indenture Act of 1939 (TIA), a Depression-era federal statute intended to protect rights to payment under a TIA-qualified indenture, which is a feature of any U.S. public offering of debt securities. Unlike earlier TIA cases, a critical element of the proposed restructuring here was explicitly permitted by the governing indenture, and no consent was required under the indenture. Nonetheless, the Court read the TIA … Read more
Recently, the United States Court of Appeals for the Second Circuit in Stratte-McClure v. Morgan Stanley, No. 13-0627-CV, 2015 WL 136312 (2d Cir. Jan. 12, 2015) affirmed dismissal of a securities fraud class action lawsuit. The Court also ruled, as a matter of first impression in the Second Circuit, that “a failure to make a required disclosure under Item 303 of Regulation S-K … in a 10-Q filing is an omission that can serve as the basis for a Section 10(b) securities fraud claim, if the omission satisfies the materiality requirements outlined in Basic v. Levinson, 485 U.S. … Read more
As has been widely reported in corporate trust circles, just before Christmas, the Second Circuit issued an important decision for RMBS trustees. In Retirement Board of the Policemen’s Annuity and Benefit Fund v. The Bank of New York Mellon, certain pension funds that invested in RMBS trusts filed suit against The Bank of New York Mellon (BNYM), as trustee of those trusts, asserting that it breached obligations under the common law and the federal Trust Indenture Act (TIA). Although the pension funds held investments in only 25 trusts for which BNYM serves as trustee, they purported to represent a … Read more
I want to thank the Brookings Institution for inviting me to comment today on Martin Wheatley’s presentation on the Fair and Effective Markets Review (Review). The Review is an ambitious and important initiative. Although London is perhaps the leading center for many fixed-income, currency, and commodities (FICC) markets, these markets are global, and the United States and the largest U.S. firms play key roles in them. So the Review addresses issues that affect our markets as well.
The Review looks to identify further steps that should be taken to restore public confidence in FICC markets in the wake of the … Read more
Corporate accounting standards are an important basis for the measurement of firm and managerial performance and for the stewardship of corporate assets in a market economy. Understanding the process that culminates with the creation of accounting standards can provide insights into both their procedural legitimacy and how they will eventually be used. In a recent study, we examine the role of auditors in the accounting standard-setting process at the Financial Accounting Standards Board (FASB).
Auditors play a crucial role in the functioning of capital markets by serving as independent agents who attest that companies, in preparing their financial reports, … Read more
The Second Circuit Court of Appeals’ 2014 ruling in Chechele v. Sperling, which addressed an issue of first impression among the Courts of Appeals regarding the application of Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to prepaid variable forward contracts (“PVFCs”), is the most recent attempt by the courts to fill in gaps in the analytical framework governing the application of Section 16 to complex derivatives. The Sperling case, which has received scant attention from commentators, is an important decision that should mitigate concern over the risk of … Read more
In recent years, top executives taking a $1 base salary (or less) has become a high-profile phenomenon across many types of organizations. The Chief Executive Officers (CEOs) of some of the most recognizable corporations, both successful and distressed, have had a $1 salary (e.g., Google, AIG and General Motors). Regulators consider the practice important, as members of the Senate Banking Committee pressed the CEOs of the three U.S. automakers to accept a $1 salary during their bailout hearings (Wall Street Journal 2008). The precedent was set in 1978 by Lee Iacocca, the former Chairman and CEO of Chrysler, who … Read more
A triad of recent decisions out of the Delaware Court of Chancery highlight the urgent need for legislative reform in Delaware to ameliorate the risk that appraisal arbitrage – now a multibillion dollar industry – poses to transactional vitality and shareholder value.
In two recent cases, In re Appraisal of Ancestry.com, Inc. (Ancestry I) and Merion Capital LP vs. BMC Software , Vice Chancellor Glasscock followed the literal interpretation of the Delaware appraisal statute adopted in 2007 by Chancellor Chandler in In re Appraisal of Transkaryotic Therapies, Inc. Before Transkaryotic, it was generally understood that … Read more
In two recent rulings, the New York Supreme Court rejected settlements arising from lawsuits in which plaintiff stockholders challenged the defendant public companies’ merger-related disclosures. The court in each case found that proposed supplemental disclosures that defendants would provide were immaterial as a matter of law and therefore the court declined to approve the settlements of the stockholders’ claims. The rulings provide helpful guidance on materiality in the context of merger disclosures and continue the trend of greater judicial scrutiny of so-called “merger tax” settlements. In light of that increased scrutiny, stockholder plaintiffs may choose to bring fewer … Read more
The recent indictment of Don Blankenship, the former chairman and CEO of Massey Energy Co., stands as a warning for company leaders confronting a crisis and raises questions about the continued viability of common approaches for responding to a crisis. The indictment stems from the 2010 explosion at the Upper Big Branch Mine in West Virginia, an incident that killed 29 miners. On Nov. 13, 2014, a federal grand jury in West Virginia charged Blankenship with conspiring to violate safety regulations and to circumvent inspections and with making false statements immediately after the incident. It is unusual to see a … Read more
The pace of regulation and enforcement actions relating to virtual currencies has continued to pick up during the fall of 2014. We discuss below the following recent developments: (1) updated guidance from the Financial Crimes Enforcement Network on the applicability of rules regarding licensed money transmitters; (2) proposed rules from the Consumer Financial Protection Bureau that could implicate bitcoin debit cards and other prepaid accounts; (3) the role of the Commodity Futures Trading Commission in regulating virtual currencies; (4) the potential consequences of Internal Revenue Service reporting requirements for foreign accounts; (5) the State of New York’s proposed “BitLicense” regulatory … Read more
The U.S. Department of Justice estimates that breaking up illegal cartels leads to consumer savings of at least 10% of annual sales in the relevant market. However, from the regulator’s perspective it is notoriously difficult to identify cartels. Even more difficult is to prove that some illegal conspiracy actually occurred: Do companies coordinate their actions by means of informal meetings in a hotel room in some remote location? Or do companies act after observing each other’s actions without exchanging a word or a text message? Both ways to coordinate actions may reduce consumer welfare, while only the former is punishable … Read more
Acquisition financing activity was robust in 2014, as the credit markets accommodated increased demand from rising M&A activity. At over $749 billion, global 2014 M&A loan issuance was up approximately 40 percent year over year, the highest total since before the Great Recession. While the aggregate figures suggest a borrower-friendly market, the actual picture is more nuanced. Investment grade acquirors benefited from a consistently strong financing environment throughout 2014 and finished the year with a flourish (including a $36 billion commitment backing Actavis’ acquisition of Allergan), while leveraged acquirors encountered more volatility, as lenders responded quickly to regulatory changes and … Read more
Stockholders’ ability to sue to protect their interests plays a critical role in corporate governance. As described by the Delaware Court of Chancery: “Due to rational passivity, ‘it is likely that in a public corporation there will be less shareholder monitoring expenditures than would be optimum from the point of the shareholders as a collectivity.’ Incentivized by contingent fees, specialized law firms representing stockholder plaintiffs can ‘pursue monitoring activities that are wealth increasing for the collectivity (the corporation or the body of its shareholders).’ ‘In so doing, corporations are safeguarded from fiduciary breaches and shareholders thereby benefit.’ Understood from … Read more
With the adoption of the Single Resolution Mechanism (SRM) the European Union (EU) established the second crucial pillar of the European Banking Union (EBU), further promoting the financial stability and efficiency of the European banking system. The EU made this significant progress not by design but by the force of necessity – the crisis rendered compelling the centralization of powers for the supervision and resolution of banks at the EU (‘federal’) level. This article briefly introduces the structural components of SRM, as well as discusses the decision-making process for the placement of a bank … Read more
Chapter 11 of the U.S. Bankruptcy Code strives to rehabilitate distressed companies and maximize creditors’ recoveries. After its enactment in 1978, the Code served those purposes well, saving companies such as Federated Department Stores, Laidlaw International, Texaco, and multiple U.S. airlines. In the process of those reorganizations, secured and unsecured creditors received distributions on their claims, employees retained their jobs, and revenue streams continued for local, state, and federal governments.
Nevertheless, today’s financial landscape is very different. The testimony from almost three years of public hearings before the American Bankruptcy Institute Commission to Study the Reform of Chapter 11 suggests … Read more
Yesterday and today, we are running a number of posts related to the recent United States v. Newman decision in which the Second Circuit overturned the convictions for insider trading and conspiracy to commit insider trading of Todd Newman and Anthony Chiasson. Messrs. Newman and Chiasson were hedge fund portfolio managers at Diamondback Capital Management, LLC and Level Global Investors, L.P., respectively. The government alleged that a cohort of analysts at various hedge funds and investment firms obtained material, nonpublic information from employees of Dell and NVIDIA—two publicly traded technology companies—shared it amongst each other, and subsequently passed it on … Read more