leslie

Arbitration Clauses as a Mechanism for Enforcing Unenforceable Contract Terms

In my article The Arbitration Bootstrap,[1] I explain how courts are misinterpreting the Federal Arbitration Act of 1925 (the FAA) in ways that allow firms to use arbitration clauses to render unenforceable contract terms enforceable. Arbitration clauses require consumers and employees to waive their rights to bring litigation in court.  Although arbitration is less protective of consumers and employees than litigation in public courts, arbitration clauses are unavoidable in many markets because firms impose contracts of adhesion that include mandatory arbitration clauses.

Arbitration bootstrapping describes situations where firms insert terms unrelated to arbitration into an arbitration clause because … Read more

Marandola and Mossucca

When Did the Stock Market Start to React Less to Downgrades by Moody’s, S&P and Fitch?

Moody’s, S&P and Fitch represent an oligopoly in the credit rating business, accounting for 94 percent of the global market (Candelon et al., 2014) and for about 96.5 percent of all the outstanding ratings in U.S.[1] The three agencies are key players in financial markets as they assess the credit worthiness of almost any debt issuer including governments, firms, municipalities and financial institutions. Moody’s, S&P and Fitch heavily affect corporate financing through ratings assigned to corporate debt. The economic literature has shown that bond ratings are strongly correlated with private bond yields (Hand et al., 1992; Hite and Warga, … Read more

O’Melveny discusses Delaware Supreme Court Confirming Business Judgment Standard For Fully Informed, Uncoerced Stockholder Vote

On May 6, 2016, in Singh v. Attenborough, No. 645, the Delaware Supreme Court strengthened the defenses available to directors by clarifying a roadmap for effectively dismissing post-closing claims for breach of fiduciary duty.  A fully informed, uncoerced vote of the majority of disinterested stockholders, and a well-run sale process with any deficiencies either avoided or disclosed in advance of the stockholder approval are key to invoking director-favorable protections against post-closing liability for breach of fiduciary duty in merger transactions.

The Supreme Court issued the Order upon reviewing Chancery Court’s dismissal of stockholder-plaintiffs’ claims for breach of fiduciary duty … Read more

Gibson Dunn discusses Reverse Morris Trusts Revisited

Over the last twelve months, over fifty US publicly traded companies with a market capitalization of over $1 billion have announced plans to spin-off lines of business into independent companies.  During that period, companies such as Starwood Hotels, ConAgra Foods, and Citrix Systems have announced spin-offs of one or more businesses.

Spin-offs are motivated by various reasons, but the common theme in these transactions is that the spun-off entity and the remaining corporation should perform better and achieve better market valuation on a stand-alone basis.

A spin-off is effected by reorganizing a line of business, contributing its assets and liabilities … Read more

Packin & Edwards (2)

Should Corporate Whistleblowers Go to Arbitration?

Following the 2008 financial crisis, more and more countries have begun to embrace whistleblower protections as a tool to change corporate cultures.  Such provisions may give whistleblowers the protections they need to raise their voices, and draw attention to undesired and sometimes even illegal activities, in situations when they would otherwise remain silent.  After all, many people will hesitate to point out questionable conduct if they know they might face retaliation.

In the United States, Congress authorized the SEC to go further than other whistleblower provisions by authorizing a bounty program—allowing the SEC to reward whistleblowers for particularly valuable tips. … Read more

Fried Frank discusses Delaware Supreme Court’s Zale Decision and Lower Risk of Liability for Bankers

The Delaware Supreme Court’s recent decision in Singh v. Attenborough (May 6, 2016, en banc, “Zale III”), written by Chief Justice Leo E. Strine, Jr., is consistent with the trend of Delaware decisions that, as a practical matter, have significantly narrowed the risk of directors being found to have breached fiduciary duties in M&A transactions. The decision is most notable, however, for apparently reversing the momentum of recent Delaware decisions that have been interpreted as potentially expanding the risk of aiding and abetting liability for M&A financial advisors.

Key Points

  • Lower risk of aiding and abetting liability for bankers.

Read more

Vince Buccola, headshot

Federalism and Federal Corporate Rights

Controversy surrounding the role of corporations in public life has not abated in the six years since the Justices decided, in Citizens United v. FEC,[1] that corporations have political-speech rights secured by the First Amendment. If anything, the Court’s judgment in Burwell v. Hobby Lobby, Inc.,[2] although far less significant in practical terms, magnified discontent in some quarters. Doomed calls for constitutional amendment are still a frequent refrain. At least one presidential candidate has reportedly proposed a litmus test to Supreme Court nominations based on a commitment to overturning Citizens United.[3] And so on. … Read more

Gogineni and Puthenpurackal

The Impact of Go-Shop Provisions in Merger Agreements

Target firms typically employ either an auction or a negotiation method during merger negotiations. In auction deals, the pre-public takeover process involves contacting several potential bidders, signing confidentiality/standstill agreements and accepting private bids. In negotiation deals however, the target engages with only one bidder in the pre-public takeover process. Using either selling method, the target board negotiates with the bidder(s) and if an acceptable price is obtained from a bidder, a definitive merger agreement is signed and a public announcement is made. Typically, after the public announcement of a merger agreement, target boards do not actively solicit new bids although … Read more

Covenant Violations, Collateral and Access to Funding: Private Firms and Public Firms

Covenants are an important feature of loan contracts that enable ongoing monitoring of borrowers by banks and flexible renegotiation of contract terms in the face of changing external and borrower conditions.  A large body of empirical research has examined the consequences of loan covenant violations for public firms.  However, little is known about how banks react to covenant violations by private companies, despite the large share of these firms in the economy. Any reduction in access to loans is likely to have a more direct impact on investment and employment for private firms since they are primarily reliant on banks … Read more

Margaret Thornton

Contemporary Legal Education and the Transformation of Private Legal Practice

There has been tension between the legal academy and the practising profession ever since law was first taught in university law schools in the 19th century. The sense of unease arose because of uncertainty as to whether the primary role of a law school was to train lawyers for practice or to ensure that law was accepted as an independent scholarly discipline appropriate for a university, like history or philosophy. Universities feared that law schools might turn out to be mere trade schools while practitioners feared that an exclusive focus on liberal education would fail to produce skilled practitioners.… Read more

Brandon Garret

Bad Hustle

“And we played the Hustle music.  There were, you know, printed materials passed out,” with dance steps so “ideally we could all perform the Hustle in precision,” recalled the former Countrywide first vice president. “There was a lot of excitement.  There was a lot of fanfare. It was fun.”  He was describing events in the summer of 2007, when Countrywide decide to speed up its process for approving loans, using a program called the “High Speed Swim Lane,” or “HSSL” (or “Hustle”).  The music stopped after the global financial crisis.  Bank of America bought out the failing Countrywide Financial.  In … Read more

Proskauer explains Supreme Court’s Clarification of Jurisdiction Under Securities Exchange Act

The U.S. Supreme Court ruled on May 16, 2016 that the provision of the Securities Exchange Act of 1934 granting federal district courts exclusive jurisdiction over suits brought to enforce the Exchange Act is subject to the same jurisdictional test established by the general federal-question jurisdictional statute. The Court held in Merrill Lynch v. Manning that, under both statutes, the question is whether the case “arises under a federal law.” The Court thus rejected the defendants’ effort to remove a case from state court by asserting a broader theory of federal jurisdiction under the Exchange Act.

Factual Background

The ManningRead more

Cleary Gottlieb explains SEC’s New Guidance on Non-GAAP Financial Measures

On May 17, 2016, the Division of Corporation Finance of the Securities and Exchange Commission (the “SEC”) released new and updated Compliance and Disclosure Interpretations (“C&DIs”) on the use of non-GAAP financial measures (“NGFMs”).  The release of the C&DIs follows a series of recent speeches by SEC Chair Mary Jo White, Chief Accountant James Schnurr and other staff that expressed concerns over prevalent and liberal use of NGFMs.  The C&DIs signal a tightening of the SEC’s policy toward NGFMs and renewed SEC focus on their use.

One new C&DI deserves special attention.

Among the new and updated C&DIs, Question 100.04 … Read more

Cicero & Mi

Do Executives Behave Better When Dishonesty is More Salient?

In recent decades, it seems the only reason one flavor of corporate or financial misbehavior falls out of the public discourse is because a newer one has taken its place. Following the widespread corporate frauds of the 1990s, the unscrupulous acts of bankers that contributed to the financial crisis, and the Ponzi scheme orchestrated by Bernie Madoff, to name a few, the thoughtful observer must be left anticipating the next scandalous headline. Given the steady flow of reprehensible actions by business professionals, a considerable amount of attention has been focused on understanding, and perhaps mitigating, egregious behaviors in the business … Read more

Eitan Goldman and Wenyu Wang

Weak Governance by Informed Large Shareholders

Concerns about the governance of public corporations have taken center stage in recent years. Part of the debate on how to improve corporate governance has focused on policies that will give large shareholders (typically institutional investors) greater influence over corporate decisions. Indeed some theoretical and empirical papers support the governance role of large shareholders.

The underlying view is that large shareholders have both the ability and incentive to maximize the value of all shareholders. Large shareholders may improve governance either through active monitoring or through passive selling and both activities are expected to improve governance.

In this paper, we propose … Read more

PwC discusses Protecting Elderly Customers: CFPB and FINRA Step In

The Consumer Financial Protection Bureau (CFPB) released recommendations in March for how banks and credit unions can better protect elderly customers from financial exploitation. The CFPB issued its recommendations as the elderly population continues to rapidly grow, positioning banks and credit unions for a significant increase in elder financial exploitation (EFE) attacks.[1]

Other regulatory bodies have taken notice of this growing threat as well and are putting forth regulations and guidance of their own. For example, the Financial Industry Regulatory Authority (FINRA) last year proposed a regulation requiring broker-dealers to take action in response to suspected EFE.

EFE is … Read more

Latham & Watkins discusses World-First Regulatory Sandbox Opening for Play in the UK

Innovative businesses in the financial services industry looking to test exciting new financial products and services able to apply to the UK’s regulatory sandbox.

The “regulatory sandbox” is the next step for the Financial Conduct Authority (FCA) as part of Project Innovate, a programme that commenced in October 2014 aiming to remove unnecessary barriers to innovation for businesses involved in banking and finance in the United Kingdom. The sandbox marks a significant leap forward in financial services regulation and is the first of its kind, globally. With the launch of Project Innovate, and now the sandbox, the FCA has positioned … Read more

Nejat and Taylan

SEC Needs to Rewrite its 10b5-1 Safe Harbor Rules

While it is illegal for insiders to trade on material, non-public information, the SEC has created a safe harbor Rule 10b5-1 since October 2000, by allowing insiders to set up trading plans in advance of actual trading.[1]  Since these planned trades are set up in advance of subsequent trading, they allow insiders to buy and sell shares despite possessing material non-public information at the time of the trade, and consequently, they can serve as an affirmative defense in case of litigation.   However, these plans are not foolproof.  There is growing suspicion among both finance and legal experts that significant … Read more

Gibson Dunn discusses PCAOB Issuance of Another Proposal to Change Audit Report

The Public Company Accounting Oversight Board (“PCAOB”) recently re-proposed an audit standard to amend the form and content requirements for the independent auditor’s report on financial statements.[1]  The new proposal retains the pass/fail model present in the existing audit report but also requires the auditor to include new disclosures in the audit report about “critical audit matters” that are identified during the course of the audit.  The re-proposal also requires new disclosures about the length of the auditor’s tenure and the applicable auditor independence requirements.

The re-proposal is the latest chapter in a standard-setting project that dates back to … Read more

Gordon Ringe

How Europe Can Survive Without Introducing Sovereign Debt Limits

EU financial policymakers appear to be once more in a deadlock situation over proposals to limit the sovereign risk exposure of European banks. The strong exposure of some banks in the southern European periphery in their national sovereign’s debt was seen by many as one of the contributing factors to the ongoing sovereign debt crisis (Acharya et al. 2014, Beltratti & Stulz 2015; Brunnermeier et al. 2016). Powerful incentives have encouraged financial institutions to buy and hold government bonds in the past (Gros 2013). In fact, this was the intellectual background for the policy framework known as the Banking Union, … Read more

Akin Gump discusses Tackling a Panamanian Money Laundering Organization

On May 5, 2016, the U.S. Department of Treasury, Office of Foreign Assets Control (OFAC) announced sanctions against 77 entities and individuals associated with the Waked Money Laundering Organization (“Waked MLO,” collectively, the “Waked Sanctions”). OFAC stated that the designation was necessary to disrupt the organization’s alleged activities in laundering drug trafficking proceeds by using trade-based methods, duty-free retail, real estate development and financial services throughout the region.
In coordination with the Drug Enforcement Administration (DEA), Customs and Border Protection and the Miami Division of the Federal Bureau of Investigation, OFAC stated that it determined that the Waked MLO uses … Read more

Keith Cunningham-Parmeter

The Uber Problem Facing Workers

Customers sure love Uber.  If you ask them to describe their experience with the ride-share firm, most Uber passengers will gladly tick off a long list of superlatives: Innovative! Economical! Revolutionary!

But a less-flattering picture of Uber has recently surfaced in courtrooms across the country.  Told by aggrieved drivers, this countervailing narrative depicts Uber as a company that cheats its workers out of wages and denies them basic workplace rights.  In fact, earlier this year, Uber agreed to pay upwards of $100 million to drivers in California and Massachusetts for alleged employment law violations.

So which is it?  Is Uber … Read more

Glover & Levine

Are Corporate Inversions Good for Shareholders?

Unlike most other countries, the U.S. taxes corporations on earnings generated anywhere in the world. This means that U.S. corporations have a strong tax incentive to renounce their U.S. incorporation and redomicile in a foreign country. Enter the inversion, a legal maneuver that has become increasingly popular and politicized in recent years, most notably with the announcement of Pfizer’s plan to move to Ireland as part of its acquisition of Allergan. Although recent rule changes by the Treasury has caused Pfizer to abandon this plan for the moment, inversions will continue to occur because of the tax benefits to the … Read more

Orrick explains Delaware Supreme Court Reaffirms KKR, But Sounds Cautionary Note to Gatekeepers

On May 6, 2016, the Delaware Supreme Court affirmed the Delaware Chancery Court’s ruling that Zale Corporation’s sale to Signet Jewelers withstood scrutiny under the business judgment rule because the transaction was approved by a fully-informed, uncoerced vote of the disinterested stockholders, and that an aiding and abetting breach of fiduciary duty claim against Zale’s financial advisor failed as a matter of law where the plaintiff failed to establish that the Zale board had acted with gross negligence.  In so holding, the Court reaffirmed its holding in Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), that … Read more

Twenty Most Cited Corporate Law & Securities Regulation Faculty in the United States, 2010-2014 (inclusive)

Rank Name School Citations Age in 2016
1 John Coffee, Jr. Columbia University 1470 72
2 Lucian Bebchuk Harvard University 1130 61
3 Stephen Bainbridge University of California, Los Angeles 1010 58
4 Reinier Kraakman Harvard University   820 67
5 Stephen Choi New York University   780 50
6 Donald Langevoort Georgetown University   770 65
7 Ronald Gilson Columbia University   760 70
8 Lynn Stout Cornell University   750 59
9 Roberta Romano Yale University   730 64
10 Henry Hansmann Yale University   720 71
11 Bernard Black Northwestern University   630 63
12 James Cox Duke University   620 73
13 Mark Roe Harvard

Read more

John Coffee, Headshot

Volkswagen and the Culture of Silence

Since the Volkswagen story first broke in September 2015, most observers have just scratched their heads and muttered to themselves in amazement: “What were they thinking?  How could you place ‘defeat devices’ in 11 million cars worldwide and expect that you were going to escape detection for long?”  There is, however, an answer to this question—one that says much about what is wrong with current priorities and practices for the enforcement of white collar crime.  This column begins with an assessment of the Volkswagen case and then turns to an analysis of white collar crime strategies.  Finally, it proposes remedies … Read more

A Pernicious Mass. Appeals Court Ruling: Redline Copy of Proposed Bylaw Changes Per Se Renders Misleading Proxy Challenge A Nullity

In Rule v. Massachusetts Mutual Life Insurance Company,[1] our client challenged MassMutual’s 2014 Proxy Statement seeking to change its company bylaws.   The Proxy told the over 1 million policyholder-owners that the proposed bylaw changes were consistent with the company’s current practices, would bring the bylaws in alignment with widely held corporate governance best practices, and would enable management to better serve the policyholders.  However, the bylaw changes were a radical departure from its current bylaws and were the antithesis of best practices (as discussed below).  Nonetheless, a Massachusetts Appeals Court sustained dismissal of the proxy challenge on grounds … Read more

Latham explains Proposed Rules on Dodd-Frank Incentive Compensation Requirements for Financial Institutions

On April 21, 2016, the National Credit Union Administration (the NCUA) issued a proposed rule regarding incentive-based compensation paid by certain financial institutions (the Proposed Rule) to implement Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Section 956).1 Section 956 requires various Federal agencies to issue regulations that limit certain incentive compensation practices at financial institutions. The Office of the Comptroller of the Currency (the OCC), the Federal Deposit Insurance Corporation (the FDIC) and the Federal Housing Finance Agency (the FHFA) released their respective versions of the proposed rule on April 26, 2016, and the … Read more

Haeberle and Henderson

Information-Dissemination Law: The Regulation of How Market-Moving Information Is Revealed

Corporate information that moves stock-market prices has long sat at the center of modern securities regulation in the United States. The Great Depression-era securities laws at the foundation of the field require much mandatory disclosure of this type of information. They also include a strict anti-fraud regime to ensure the credibility of those disclosures of that information. And for a half century now, that regime has been interpreted to prohibit insiders from trading on the same information. All of these laws have been motivated by both concerns for fairness and economic efficiency.

Today, a new body of securities law is … Read more

donatiello-larcker-tayan

CEO Pay, Performance, and Value Sharing

We recently published a paper on CEO compensation and value sharing between executives and shareholders. The paper is available here.

CEO compensation is a controversial subject that evokes considerable debate on whether public company CEOs are paid correctly relative to corporate performance. A recent survey by Heidrick & Struggles and the Rock Center for Corporate Governance highlights the extreme disconnect between public perception of CEO pay and the perception of directors responsible for designing pay packages at Fortune 500 companies. While 65 percent of directors believe that CEO pay is not a problem, a full 70 percent of the … Read more

Iliev and Lowry

Venturing Beyond the IPO: Venture Capitalists’ Investments in Newly Public Firms

A wide body of literature emphasizes that venture capitalists focus on young private companies, generally in high-tech industries. However, contrary to this notion, we find that 29% of the firms that were backed by VCs prior to the IPO received additional VC funding within the first five years after the IPO, in a sample of IPOs between 1988 and 2010.

We find that this post-IPO VC financing is focused on companies with high information asymmetry and substantial growth opportunities.  These   companies  might otherwise find it difficult to raise capital at a viable price (see, e.g., Myers and Majluf, 1984).  In … Read more

Shearman & Sterling discusses Making the Safe Harbors Safe Again: Second Circuit Holds State Law Constructive Fraudulent Conveyance Claims Are Preempted by the Safe Harbor of Section 546(e) of the Bankruptcy Code

In a March 29, 2016 decision,[1] the United States Court of Appeals for the Second Circuit (the “Court of Appeals”) held that creditors are preempted from asserting state law constructive fraudulent conveyance claims by virtue of the Bankruptcy Code’s “safe harbors” that, among other things, exempt transfers made in connection with a contract for the purchase, sale or loan of a security (here, in the context of a leveraged buyout (“LBO”)), from being clawed back into the bankruptcy estate for distribution to creditors. The decision will serve to promote finality and certainty for investors by limiting the circumstances (e.g.Read more

Ghosh and He

Is Cross-listing on U.S. Markets still Beneficial to Foreign Firms?

U.S. capital market has long been an attractive destination to foreign companies. Cross-listing by foreign firms on U.S. exchanges has been associated with major benefits such as increase in value, easier access to external finance, and lower cost of capital.  A recent deregulation by SEC in 2007, Rule 12h-6, may have significant impact on the benefits of cross-listing and the attractiveness of U.S. capital market to foreign firms.  Our study explores the long-term consequences of this deregulation and its implication for U.S. capital market.

The main drivers of the benefits enjoyed by cross-listed foreign firms is a subject of passionate … Read more

Aurelio Gurrea Martinez

Shareholder Activists: A Threat for the Global Economy?

The rise of shareholder activism has become a global phenomenon. Shareholder activists are not only present–as they started–in the US, but also in European and Asian Markets.[1] This situation has generated a vast literature about the desirability (or not) of shareholder activism. [2] In essence, there are two main positions: (i) those who argue that shareholder activists improve the corporate governance of the firm, and therefore they help increase the value of the firm;[3] and (ii) those who claim that shareholder activists only improve the value of the firm in the short-term, and they encourage managers to cut … Read more

PwC discusses Ten Key Points from the SEC’s Business Conduct Standards for Swap Entities

One down, three to go: SEC rulemaking is heating up.

Last month, the Securities and Exchange Commission (SEC) finalized business conduct standards for security-based swap dealers (SBSDs).[1] The completion of this rule by the SEC is significant because few security-based swap (SBS) rules have been finalized as compared to the numerous rules completed by the Commodity Futures Trading Commission (CFTC) that govern other types of swaps.[2] These business conduct standards represent the first of four rulemakings that must be finalized before SBSDs will have to register with the SEC.[3]

The SEC’s rule will impact how SBSDs communicate … Read more

Michelle Harner Headshot

Disciplining Corporate Boards and Debtholders Through Targeted Proxy Access

Corporate directors inevitably must make real-time decisions on complex and nuanced matters that impact not only the company, but also the company’s various stakeholders—e.g., shareholders, creditors, and employees.  The pressure cooker that often is the corporate boardroom is not for the faint of heart.  The directors’ job becomes even more challenging when the company experiences a financial or operational setback.  The divergence in interests among the company’ stakeholders intensifies, and there rarely is one clear path forward.

In theory, state law fiduciary duties should guide directors’ decisions in these difficult situations and protect the company’s and its shareholders’ interests.  In … Read more

judge-140x150

Putting the Fall of LendingClub in Perspective

On Monday, LendingClub Corp., a leader in the growing online lending space, announced the surprise resignation of its founder and CEO, Renaud Laplanche.  Laplanche resigned in response to a board investigation that revealed a number of internal control failures, including the sale of more than $20 million in loans that failed to conform to the requirements imposed by the acquiring investors and the doctoring of dates on loan applications to cover up noncompliance with respect to $3 million in loans sold.  These developments triggered a massive decline in LendingClub’s stock price, but also contribute to a growing cacophony of questions … Read more

Shawn Bayern

A Reassessment of General Partnership Law

General partnerships are a puzzling form of business in the modern world. A well-established business form with a deep history and sophisticated uniform laws, the general partnership finds itself in a strange position today:  Virtually nobody would be well advised to create one.

As a result, general partnerships come about mainly by accident.  Indeed, probably the most often litigated question in general partnership law is simply whether one exists in the first place, with the putative organizers trying to claim that they didn’t in fact create one.

General partnerships are the only multi-person business organization that can arise accidentally … Read more

do-nguyen-nguyen1

Directors as Connectors

The corporate board is commonly seen as a crucial governance device that operates to both monitor corporate management and provide strategic advice. Recent corporate governance research has discovered a broad range of evidence of internal board monitoring and advisory activities; but relatively little on the impact of the board’s interactions and connections with different external agents on firm value and corporate decisions. Yet, board members are typically experienced and powerful businessmen, and well embedded in the center of important business and social networks. Does it matter?

Yes, substantially. In our recent paper “Directors as Connectors: The Impact of the External … Read more

Vollmer_Andrew

A Rule of Construction for Salman

The Supreme Court decided to consider the meaning of the personal benefit requirement in an insider trading case based on a tipping violation. It accepted review of the Ninth Circuit’s decision in United States v. Salman,[1] which reached substantially different conclusions about the meaning of the personal benefit requirement than the Second Circuit did in United States v. Newman.[2]

The personal benefit requirement is an essential element of a tipping violation. For tipping to occur, an insider must breach a duty of trust and confidence by disclosing material nonpublic information to another person, and the test … Read more

Dyer, Lang & Stice-Lawrence

The Ever-Expanding 10-K: Why Are 10-Ks Getting So Much Longer (and Does It Matter)?

Recently, there has been concern among investors, preparers, regulators, and standard setters that corporate disclosure (in particular the annual report, Form 10-K) is becoming increasingly lengthy, redundant, complex, and onerous. In December 2013, the SEC began a comprehensive review of current disclosure regulation with the intent of identifying the extent of excessive, unduly complex, and redundant disclosure. Similarly, the FASB has an ongoing agenda project, the Disclosure Framework, evaluating the effectiveness of firm disclosure. A variety of explanations have been offered for the apparent increase in the quantity and complexity of disclosure including the effects of litigation, increases in business … Read more

Peter Molk

How Do LLC Owners Contract Around Default Statutory Protections?

Limited liability companies, or LLCs, have quickly become the form of choice for new businesses.  Companies ranging from the well known, like Chrysler, to the more experimental, such as French fry vending machine makers, to local flooring installers all organize as LLCs.  One attraction is LLCs’ ability to replicate S-corporations’ robust limited liability protection and potential for single taxation of company profits.  Another attraction is the wide contractual freedom permitted among owners and managers to divide up ownership and management rights and responsibilities.  Most states impose few mandatory rules on this relationship.  For instance, Delaware, the leader in out of … Read more

chen-hong-kim-ryou

Information Processing Costs and Corporate Tax Aggressiveness: Evidence from the SEC’s XBRL Mandate

In 2009, the U.S. Securities and Exchange Commission (SEC) mandated all registrants to file their 10-K and 10-Q in an interactive format using the eXtensible Business Reporting Language (XBRL). The SEC adopted a phase-in implementation policy: the first phase started in 2009 and required companies with a worldwide public equity float of at least $5 billion to implement XBRL-based financial reporting; the second phase for all other large domestic filers with a public equity float of more than $700 million took effect in 2010; and the last phase took effect in 2011 with smaller reporting firms required to report financial … Read more

Avci, Schipani and Seyhun

Dark Side of Equity Gifts by Corporate Executives

They say that one should not look a gift horse in the mouth. We decided to go against this proverb and look carefully in the mouth of one such gift horse. After all, we still remember from high school reading that in addition to the shirt of Nessus, the Trojan horse as being not such a tantalizing gift.   In this blog, we examine corporate executives’ gifts of common stocks to see they resemble the shirt of Nessus or the Trojan horse.

We find that corporate executives’ gifts of stock while not quite poisonous, do have a dark side. We find … Read more

Choi & Spier

Taking a Financial Position in Your Opponent in Litigation

Plaintiffs sometimes have significant financial interests in their opponents, interests that extend beyond the boundaries of the lawsuits themselves.  In some situations, plaintiffs maintain a “long” financial position.  For instance, in securities litigation or direct or derivative litigation alleging a breach of fiduciary duties under state corporate law, the plaintiffs are typically a subset of the firm’s current shareholders.  When the defendant-firm loses at trial and pays damages—or, more commonly, avoids trial by retaining defense counsel and/or making a settlement payment to plaintiffs and their counsel—while the plaintiff-shareholders may receive a direct monetary benefit, they also suffer an indirect loss … Read more

Shroff, Verdi and Yost

Intertemporal Variation in the Externalities of Peer-Firm Disclosures

One of the primary rationales in favor of regulating disclosure is that more information may create positive externalities, or spillover effects, by helping investors learn about industry- or economy-wide trends and growth opportunities. In this way, a firm’s public disclosures informs investors not only about that specific firm’s prospects, but also about the prospects of related, peer firms. Thus, the more firms within an industry disclosing regular, publicly available information, the less uncertainty exists among investors regarding the value of all firms in that industry. Although the idea is intuitive, it has been difficult to empirically examine the existence of … Read more

Professor Kate Judge Honored for Leading Corporate and Securities Law Article

The work of Columbia Law School Professor Kate Judge appears in the list of twelve best corporate and securities law articles in 2015, based on a poll conducted by the Corporate Practice Commentator.  Teachers in corporate and securities law were asked to select the best corporate and securities articles from a list of articles published and indexed in legal journals during 2015.  More than 540 articles were on the list.  Professor Judge was selected for her article Intermediary Influence appearing in the University of Chicago Law Review.… Read more

Charles Silver

A Private Law Defense of the Ethic of Zeal

In an article recently posted on SSRN.com, I explain why the law requires agents to act with single-minded devotion to their principals.  For example, a lawyer must do what is best for a client and may not subordinate a client’s interest to that of anyone else.  This is true even when a lawful act beneficial to a client would subject a third party to serious harm.  When representing a landlord who wants a derelict tenant evicted, for example, a lawyer must prosecute the eviction expeditiously even if the tenant has nowhere else to go.

In the parlance of legal … Read more

Joseph Lee

Intra-Corporate Dispute Arbitration in the UK, US, and China

Intra-corporate dispute (ICD) arbitration may cover a wide range of disputes between shareholders, between shareholders and the company, and between shareholders and third parties such as the company directors. ICD arbitration has been practiced in the US for many years for resolving disputes both in non-listed and listed companies. It has also been used for shareholder claims for breach of fiduciary duty against the company’s directors in a takeover bid (tender offer). In my paper, I argue for the UK to facilitate ICD arbitration more widely and, in particular, for UK listed companies. However, I also discuss that although the … Read more

Cleary Gottlieb discusses CFPB Rulemaking on Arbitration Agreements in Financial Products and Services Contracts

On May 5, 2016, the Consumer Financial Protection Bureau (“CFPB”) proposed a rule that would  govern two aspects of consumer finance dispute resolution.  First, the new regulations would prohibit providers of certain consumer financial products and services from including in their contracts arbitration clauses that prohibit class action lawsuits.  Second, covered providers involved in an arbitration pursuant to a pre-dispute arbitration agreement would be required to submit specified arbitral records to the CFPB.  If the proposed rule becomes final, it will significantly impact the current industry practice of including arbitration clauses with class action waivers in these types of contracts, … Read more

Daniel Sang

Salman v. United States and Insider Tipping: What Could be Decided?

In Salman v. United States,[1] the Supreme Court will revisit Dirks v. SEC[2] and likely resolve the uncertainty as to personal benefit and insider gifts of confidential information that followed the Second Circuit’s decision in United States v. Newman.[3]  The case involves a young investment banker’s gifts of information about unannounced client transactions to his brother, who, in turn, shared the tips with their relative by marriage, the defendant Bassam Salman.

Salman will also be the first time that the Court decides the liability of a downstream insider trading tippee.  A decision will therefore likely … Read more

Davis Polk discusses Appellate Reversal of $1.3 Billion Penalty Against Countrywide, Based on Appellate Finding of Lack of Intent

On May 23, 2016, the United States Court of Appeals for the Second Circuit reversed a $1.3 billion civil penalty imposed against Countrywide Home Loans, Inc., Bank of America, N.A., and related defendants (collectively, “Countrywide”) under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”).[1]  Although the decision rebuffed the government’s case against Countrywide, it did not address the government’s novel interpretation that FIRREA permits civil penalties against financial institutions whose criminal conduct is “self-affecting.”  FIRREA permits civil penalties against a defendant if it commits certain unlawful acts “affecting a federally insured financial institution.”[2]  Over a … Read more

Long Live the Editor

After the July 4th weekend, Reynolds Holding will be taking over as the fourth editor-at-large of the CLS Blue Sky Blog.  It has been a remarkable year and a half, and I am confident our Blog will continue to grow in the coming years.  I am grateful to the faculty committee (Professors Jack Coffee, Ed Greene, Robert Jackson and Kate Judge), the student editors (Jennifer Barrows, AJ Farkas and John Knight) as well as Columbia Law School for providing opportunity and support.  I intend to continue writing as time allows and invite you to visit my webpage.  I believe … Read more