Delaware has reigned as the preeminent corporate law jurisdiction in the United States for over a century, weathering the rivalry of eager state competitors (such as Maryland and Nevada) and the looming presence of – and occasional intervention by – the federal government. Various explanations have been provided as to why Delaware continues to dominate. And various assessments have been offered as to whether, overall, Delaware’s corporate law jurisprudence is beneficial or detrimental for investors. These explanations and assessments typically focus on what Delaware has done well over the years to retain its supremacy, not on what, deliberately or fortuitously, … Read more
Delaware law provides important tools for directors to maintain control of derivative lawsuits.1 One such tool is the “demand requirement” embodied in Court of Chancery Rule 23.1, which requires that before a stockholder acts on behalf of the corporation, the stockholder must either demand that the board take action or establish that demand would be futile. The seminal opinion of the Delaware Supreme Court in Aronson v. Lewis established the test used by Delaware courts in determining whether a plaintiff stockholder’s demand would have been futile: Has the plaintiff stockholder seeking to proceed with a claim on behalf of … Read more
Notwithstanding decidedly hostile testimony last month from this humble columnist, the U.S. House of Representatives will soon pass legislation (probably on a strict party-line basis) entitled, “The Financial CHOICE Act of 2017” (H.R. 10) (which acronym stands for “Creating Hope and Optimism for Investors, Corporations, and Entrepreneurs”). Despite this cutesy and innocuous title, the CHOICE Act proposes dangerous and radical surgery that would gut those provisions of the Dodd-Frank Act that seek to prevent the failure of a single major bank from setting off a chain reaction that could bring down all interconnected banks. Indeed, the Act reads as … Read more
Global M&A activity in April 2017 declined by most measures from its March 2017 level, while the U.S. showed more mixed results. Globally, total deal volume, as measured by dollar value, decreased by 16.6% to $253.91 billion, whereas in the U.S., a large increase in average deal size led to a 58.4% increase in total dollar volume to $108.11 billion. The increase in U.S. volume came despite a 27.1% decrease in number of deals to 669, similar to the global decrease of 25.3% to 2,708 (a new 12-month low for number of deals globally).
Strategic vs. Sponsor Activity
Strategic activity … Read more
Corporations have been making news recently with repeated violations of the law. In some cases, such as financial services, the violations have occurred across large segments of an industry. Enforcement officials have imposed billions of dollars in sanctions against all the major U.S. financial institutions and many foreign ones as well. The large sanctions are the result of findings of recurring violations of law as well as recidivism. Why have regulatory standards and enforcement policies led to repeated violations? Will the recent billion dollar sanctions deter future wrongdoing? In my recent article, Corporate Wrongdoing: Interactions of Legal Mandates and … Read more
Society imposes legal requirements on businesses (issuers) when they offer or sell their securities to investors. These rules governing capital formation are generated both at the federal and state levels. State securities rules are generally referred to as “state blue sky laws.”
Both the federal rules and state blue sky laws contain antifraud provisions, which prohibit issuers that offer or sell their securities to investors from engaging in manipulative or deceptive acts. Federal and state rules also contain registration rules, which typically require issuers to provide closely prescribed investment information to designated state and federal governmental agencies (the Securities … Read more
Republicans on the House Financial Services Committee, led by Chairman Jeb Hensarling (R-TX), approved their “Financial CHOICE Act” (FCA) legislation on a party-line 34-26 vote on May 4, clearing the way for consideration on the House floor in the coming weeks. The Committee held this vote following a marathon three-day markup session that saw Committee Republicans defeat numerous Democratic amendments and other delaying tactics. The markup session was a clearly partisan affair that is indicative of the bill’s uncertain future in the closely divided Senate.
How can regulators best respond to financial crises? In a forthcoming article in the Duke Law Journal, I show how a law-and-economics framework can guide regulators’ responses. There are two kinds of remedies for failing to comply with a law: property rules and liability rules. Liability rules require compensation, such as money damages. Property rules impose draconian penalties, such as injunctions, punitive damages, or large fines. Property rules can make sense during normal times, because the threat of harsh penalties ensures compliance. But financial crises upend many normal assumptions and prevent some entities from complying with all of their legal … Read more
In my recent paper, Tax Avoidance, Income Diversion, and Shareholder Value: Evidence from a Quasi-Natural Experiment, I examine how the interaction between the corporate tax system and corporate governance affects firm value. To this end, I empirically investigate two main questions. First, do investors value corporate tax avoidance? I find that, on average, they do. Second, does the corporate tax system (which includes both taxes and tax enforcement) affect the level of income diversion? I find that market reactions suggest that higher tax rates can erode good corporate governance by increasing the return from income diversion, and that stricter … Read more
Tax planning by multinational enterprises (MNEs) is estimated to generate a worldwide loss of corporate tax revenues of between $100 billion and $240 billion. U.S.-based MNEs alone are believed to retain a total of $2 trillion in earnings outside the U.S., largely for tax reasons. Over the last few years, the Organization for Economic Cooperation and Development (OECD) has been trying to come to grips with the tax reduction strategies of MNEs. Its results, presented in the 2015 final reports of BEPS (Base Erosion and Profit Shifting) have disappointed many. That is understandable: Most of the proposals depend on further … Read more
Time and time again, experience has shown how important it is, to business and society, for individuals to speak up when they encounter problems or wrongdoing in the workplace. The scandal at WorldCom broke only after employees publicly blew the whistle on executives. An Enron employee reported problems to the IRS in 1999, long before the firm’s failure in 2001 and, some speculate, early enough to have allowed the firm to survive if the problems had been addressed. In the wake of scandal, Volkswagen offered internal immunity to employees who blew the whistle regarding cheating on emissions tests … Read more
Tucked into the Financial Choice Act (FCA), the recent endeavor in the House of Representatives to overturn significant segments of the Dodd-Frank Act, was an entirely unrelated provision. Section 844 of the FCA proposed a number of changes to Rule 14a-8, including tougher eligibility standards. To submit a proposal, shareholders would have to own at least 1 percent of a company’s outstanding voting shares continuously for three years. Instead of holding around 15 shares of Apple for 12 months, the proposed standards would require something closer to 5 million shares for 36 months. Instead of acquiring $2000 worth … Read more
It is a pleasure to be at the Hoover Institution again. I was privileged to be a Visiting Scholar here from 1981 to 1982. In addition, many of the researchers and practitioners with whom I have discussed monetary policy over the years have had affiliations with the Hoover Institution–including several people here today. It is a pleasure also to have been invited to speak at this Hoover Institution Monetary Policy Conference, for the Hoover conference series provides a valuable forum for policymakers and researchers to engage in dialogue about important monetary policy issues facing the United States and other countries.… Read more
A significant emerging governance issue is how best to monitor – and influence – the management style of senior executives who by nature are insensitive to the risks of their initiatives. As recent controversies across multiple industry sectors confirm, such insensitivity can lead to extraordinary legal, accounting and reputational crises for the organization.
The issue extends beyond the chief executive officer to other senior officers (e.g., the chief operating officer, the chief financial officer, the chief information officer) with significant organizational portfolios and the authority to implement strategic initiatives. Their potential insensitivity to risk can similarly trigger enterprise-level concerns.
The … Read more
On April 21, 2017, President Trump signed two presidential memoranda calling for review of portions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). These presidential memoranda follow the executive order signed on February 3 (see our client alert here) setting forth “Core Principles” intended to guide the regulation of the U.S. financial system.
Orderly Liquidation Authority
The first presidential memorandum (available here) directs the Secretary of the Treasury to review the Dodd-Frank Orderly Liquidation Authority, which provides a mechanism for the seizure, break up and winding down of a failing non-bank … Read more
Few areas of business stir up more controversy than private equity. Critics slam private equity firms for destroying companies by layering on debt, firing employees, and cutting costs at every opportunity. Proponents, on the other hand, respond that any changes they make to companies are painful but necessary to improve the inefficient companies that they acquire—and they dispute the charges about destroying jobs.
In The Public Cost of Private Equity, I explore a different, and potentially more worrisome, aspect of private equity: its corporate governance structure. While less visible to outside observers, corporate governance plays a critical role in … Read more
Thank you for the kind introduction. I’m grateful for the opportunity to speak at this financial reporting conference for the second time.
Before I continue, let me remind you that the views expressed today are my own and not necessarily those of the Commission, the individual Commissioners, or other colleagues on the Commission staff.
Let me also express a word of gratitude to the entire OCA team for their work in providing advice to the Commission regarding accounting and auditing matters arising in the administration of the federal securities laws. I want to also acknowledge their valuable assistance in preparing … Read more
Attacks on the authority of the Financial Stability Oversight Council (“FSOC”) to designate non-bank financial firms as systemically important, and thus subject to the Fed’s oversight, are misguided.  Such authority is essential to the long-term maintenance of financial stability, because financial intermediation will increasingly move outside the current regulatory perimeter. The most effective way for FSOC to use designation authority, however, is prospectively: to negotiate size and regulatory constraints with firms to avoid designation, because the optimal number of additional systemic firms is zero.
Historically, financial crises have been of two general types: foreign exchange and domestic banking. A … Read more
The United States has long offered its domestic industrial base preferential treatment in the Federal government marketplace through laws and regulations requiring agencies to prefer purchase of American-made products and contracts with American companies, and only resort to other sources in circumstances of genuine need. On April 18, 2017, President Trump issued an Executive Order (Order) intended to emphasize and potentially strengthen these policies. The Order, entitled “Buy American and Hire American,” defines “Buy American Laws” as “all statutes, regulations, rules, and Executive Orders relating to Federal procurement or Federal grants”—including those that refer to “Buy America” or “Buy American”—“that … Read more
It is common wisdom among transactional lawyers that good teamwork results in smoother deals and better service for their clients. Perhaps for this reason, capital-markets practices frequently tout their teamwork skills as a source of value for clients, especially in securities offerings where lawyers acting for issuing companies work closely with underwriters and their lawyers in a team-like fashion, all pulling for the success of the issuing company.
However, teamwork holds a potential pitfall for transactional lawyers, because their desire to work collaboratively with other parties in a deal can blunt their ability to advocate effectively on behalf of their … Read more
In his May 5 post, available here, Stanislav Dolgopolov states that the Securities and Exchange Commission’s recent settlement with Citadel “undermines the so-called ‘Berkeley Study’ which concluded that off-exchange market makers can neither profitably engage in data feed arbitrage by ‘filling marketable orders at (or within) the SIP-generated NBBO [National Best Bid and Offer] . . . at stale prices to the disadvantage of retail investors’ nor ‘choose as their pricing benchmark the slower SIP-generated NBBO to boost their performance metrics.’” Mr. Dolgopolov further states that our study “skirted the fact that relevant strategies do not rely on choosing … Read more
For the last 40 years, the problem of managerial agency costs—corporate managers shirking duties and diverting resources—has dominated the study of corporate law and governance. Many scholars treat the reduction of agency costs as the essential function of corporate law and governance. To reduce agency costs, these scholars would mandate corporate governance arrangements that empower shareholders to hold managers accountable, such as majority voting and proxy access. And they would ban arrangements that disempower shareholders, such as staggered boards and dual-class shares. Similarly, they support hostile takeovers and hedge fund activism to combat management entrenchment and reduce agency costs. To … Read more
The Delaware Supreme Court’s decision in Corwin v. KKR Financial Holdings LLC set a high bar for plaintiff stockholders seeking to challenge public company mergers. Assuming a transaction that is not subject to entire fairness review was approved by a fully informed, uncoerced, disinterested vote of a majority of the stockholders of a target corporation, the business judgment rule applies to post-closing damage suits and, as further clarified by the Supreme Court decision in Singh v. Attenborough, a plaintiff could only challenge such a merger on the basis that it constituted waste. The decision in Co… Read more
The recent settlement between the U.S. Securities and Exchange Commission (“SEC”) and Citadel Securities is a landmark in the market structure enforcement program. In a nutshell, the regulators targeted high-speed algorithms that opportunistically used different market data benchmarks and involved undisclosed order handling mechanics. Importantly, this settlement may have revealed more than just the SEC’s skillful exposure of yet another hidden wrinkle in the modern electronic marketplace or a description of discontinued practices at one firm. This settlement could shed light on the opaque overlap between high-frequency trading (“HFT”) and off-exchange market making, thus subjecting to scrutiny—whether regulatory, legal, … Read more
In the 100 days since his election, President Trump and members of his cabinet have continued public calls for a rollback of Dodd-Frank and related regulations enacted since the financial crisis, while offering few concrete actions or proposals. Initially, Wall Street (and specifically bank stocks) rallied heavily in anticipation of business-friendly deregulation and tax reform, but bank executives have since tempered their expectations and, at least among the big banks, quieted calls for broad reform.
As we anticipated last November, the Trump Administration largely departed from the anti-bank populism espoused during the campaign and quickly moved on to more traditional … Read more
Side agreements between creditors of a corporate debtor can dictate how those creditors act when the debtor files for bankruptcy. For example, intercreditor agreements commonly include a promise by one party to remain silent – to waive some procedural right that the party would otherwise have under the Bankruptcy Code – at potentially crucial points in the reorganization process. Because these agreements can alter bankruptcy outcomes even for those outside of the agreement, they are controversial. In a forthcoming article, “Bankruptcy on the Side,” we provide a framework for analyzing these agreements.
Using simplified examples, we show that side agreements … Read more
Merritt Fox, Zohar Goshen, and Eric Talley were among the authors of three of the 10 best corporate and securities articles last year, the Corporate Practice Commentator has announced. The Columbia Law School professors were joined by Gabriel Rauterberg, who was a research scholar at the school when he wrote one of the selected pieces with Fox and Lawrence Glosten, a professor at Columbia Business School.
The Corporate Practice Commentator’s Robert Thompson, a professor at Georgetown Law School, conducted the 23rd annual poll to compile the top-10 list. Teachers of corporate and securities law voted to select the best … Read more
Three pending cases – United States v. Martoma, and the habeas corpus cases Gupta v. United States and Whitman v. United States – will allow the U.S. Court of Appeals for the Second Circuit to examine United States v. Newman in light of Salman v. United States. In Salman, the Supreme Court rejected a Newman-based argument and held that a banker’s gratuitous tips to his brother violated Dirks v. SEC’s ban on insider gifts of information to trading relatives and friends. However, Martoma, Gupta, and Whitman have argued that Newman remains … Read more
We can learn a lot from the evolution of smartphones as we try to envisage where the fintech ecosystem–and banks’ role within it–might be heading in the future. Smartphones have ushered in an age when different companies can easily work with each other’s products to seamlessly provide services to consumers. Today I want to reflect on what we might learn from that model about the increasingly interconnected world of financial services.
Executives, directors and other corporate insiders have privileged access to material non-public information. Previous research shows that trades by insiders are informed, on average. For example, insider purchases tend to precede positive stock returns. In addition, like other investors, corporate insiders may have different investment horizons (i.e., anticipated stock-holding periods) when they trade their company’s stock, depending on their personal investment objectives and styles; desire for liquidity, diversification, or corporate control;, compensation contracts; or understanding and attitude toward insider trading laws.
The use of third-party litigation financing — generally defined as the funding of litigation activities by entities other than the parties themselves, their insurers or their counsel — continues to increase in the United States. One recent survey showed that nearly 30 percent of private practice attorneys and firms surveyed reported using alternative litigation funding, compared to 7 percent in 2013. In March 2017, a third-party litigation financier reported that its current average investment in new cases is approximately $13 million, up from less than $4 million in 2013. In 2016, the worldwide market for third-party litigation financing was estimated … Read more
While all acquisitions require approval from target shareholders, the necessary level of shareholder support varies across jurisdictions and deal structures. Some transactions can be approved by a simple majority of target shareholders, while others require super-majority approval. In our paper, Shareholder Decision Rights in Acquisitions: Evidence from Tender Offers, we investigate the impact of such variation on deal outcomes, particularly on the choice between a tender offer and merger structure.
To isolate variation in approval thresholds, we use the 2013 enactment of Delaware General Corporation Law § 251(h), which reduced the shareholder support threshold to close out a two-step … Read more
On April 19, 2017, the Office of the Comptroller of the Currency (“OCC”) released its “Lessons Learned Review of Supervision of Sales Practices at Wells Fargo.”[i] The report results from Comptroller Thomas Curry’s directive for an “independent review” of the Wells Fargo supervisory record to “identify any supervision gaps and lessons learned to improve the OCC’s supervisory processes going forward.”
The OCC report mirrors some of the themes of the Wells Fargo investigation report, which we have discussed in a prior memorandum.[ii] According to the OCC report, examiners missed opportunities to probe more deeply into sales practices problems, search for … Read more
In our recent study, we find that institutional investors follow high-performing directors to new firms and make larger initial investments in those firms than in other firms. Fama (1980) and Fama and Jensen (1983) support our finding and propose that such directors are especially skilled at advising and monitoring their firms to ensure that shareholder interests are protected.
The notion that institutional investors might follow some directors also receives support from recent work that shows that some directors create more shareholder value than others (e.g., Masulis and Mobbs 2011; Masulis and Mobbs 2014). Anecdotal evidence suggests that large institutional investors … Read more
Corporate governance mechanisms that mitigate problems associated with the separation of ownership and control include board monitoring of managers, compensation incentives, a market for corporate control, and government regulation. Recently, shareholder activism has become an increasingly popular tool as well. Typically, activism involves a hedge fund or other institutional investor with an arm’s-length relationship to a firm acquiring a concentrated stake in that firm and prodding management to make value-enhancing changes. In our study, we find that individual investors who are at the periphery of control, such as founders and former executives, also launch activist campaigns, a phenomenon we term … Read more
I appreciate your invitation to participate in this [April 19] panel discussion. In my remarks, I will discuss how U.S. monetary policy actions affect our foreign trading partners, with particular focus on how foreign economies have responded to the Federal Open Market Committee’s (FOMC) ongoing normalization of policy rates.1
Spillovers from the Fed’s Unconventional Policies
Extensive empirical research on spillovers–including by Federal Reserve and International Monetary Fund (IMF) staff members–indicates that spillovers from the actions of major central banks occur through several important channels.2 While the exchange rate is a key channel of transmission and gets a great … Read more
The Obama administration had a mixed record on white collar crime. On one hand, it extracted $4 billion and a guilty plea from BP in the wake of the Deepwater Horizon spill. On the other hand, it allowed HSBC, then the fourth largest bank in the world, to sign a deferred prosecution agreement (DPA) over charges of laundering money for a Mexican drug cartel and serving as a banker for illicit regimes in Burma, Cuba, Iran, Libya, and Sudan. The bank paid $1.256 billion in penalties, but because it never admitted its crimes and controlled such vast amounts of money, … Read more
Thank you for inviting me to speak here today (April 20).1 I will begin by looking back at the global financial crisis and the great recession, which were arriving on the horizon at about this time 10 years ago. For the United States and many other countries, this would turn out to be the most painful economic crisis since the Great Depression. The fact that we had a severe recession but not another depression is a tribute to the aggressive response of those who were in a position to act at that time.2
In the event, the financial … Read more
Investor activism is an important mechanism by which a company’s shareholders can affect corporate decisionmaking. To legally compel corporate managers to change policies, activist investors must engage in proxy fights during which they solicit support for their proposals from other shareholders. Proxy fights involve significant costs and therefore are infrequent: 91 percent of the activist campaigns in our sample do not involve proxy fights. Given the infrequency of proxy fights, a natural intuition would be that target managers rarely concede to activist demands. However, we show that activist campaigns without proxy fights are surprisingly effective. This leads to an important … Read more
Insider trading law may be headed for even more disruption, as federal and state watchdogs press broad theories that include hacking and so-called Insider Trading 2.0, the early release of information for a fee, a panel of legal experts said on April 20.
Speaking at the M&A and Corporate Governance Conference in New York, the panel of lawyers and regulators tested the bounds of rules against insider trading in response to a series of hypotheticals posed by Professor John C. Coffee, Jr. of Columbia Law School. An attorney with the U.S. Securities and Exchange Commission said, for example, that the … Read more
The prescription drug industry has undergone a significant transformation in recent decades. The intensifying competition from generic drugs, the expanding power of entities that pay for drugs and negotiate drug prices, the increasing costs of drug development and gaining approval from the Food and Drug Administration, and the growing risks of commercial failure have strained the finances of many traditional drug companies. Many companies have responded by consolidating to either reduce costs or create new sources of revenue. As a result, the number of mergers and acquisitions (M&A) in the pharmaceutical industry recently hit an all-time high.
As pharmaceutical M&A … Read more
It’s been five years since Concepcion made “clear” that the Federal Arbitration Act (FAA) preempts state laws that forbid class action waivers. Concepcion did not protect arbitration agreements from laws of general applicability (such as unconscionability), but it did confirm that the FAA preempts state laws that seek to limit or invalidate various arbitration provisions.
In its decision on April 6 in McGill v. Citibank, the California Supreme Court fired the latest salvo in the battle over arbitration clauses. In McGill, Citibank sought to compel arbitration of claims under California’s Unfair Competition Law (UCL), False Advertising … Read more
In a recent decision in In re Investor Bancorp, Inc. Stockholder Litigation, the Delaware Court of Chancery held that a fully informed stockholder vote approving adoption of an equity incentive plan also ratified subsequent equity awards to individual directors under the plan. The court found that the plan included limits on grants to directors as a beneficiary group, as opposed to “generic” limits applicable to all plan beneficiaries. In dismissing the shareholder derivative suit, the court applied the business judgment standard of review to the directors’ decision to make the awards to themselves.
In 2015, the directors of … Read more
We examine the relations among various types of family firms, including those named after their founders (founder-named, or FN, firms), those managed by their founders (founder-managed, or FM, firms), and those named after and managed by their founders (founder-named-and-managed, or FN&M, firms). Our empirical results establish a strong and consistent pattern among family firm types. Consistent with the previous literature, we show that family firms are generally more valuable than their non-family counterparts, and that founder-managed (FM) firms are more valuable than their non-founder-managed (non-FM) counterparts. More important, we provide new evidence that founder-named (FN) family firms have significantly lower … Read more
In a series of decisions that began with Corwin v. KKR Financial Holdings LLC, it is now clear under Delaware law that boards of directors will receive the protection of the business judgment rule “when a merger that is not subject to the entire fairness standard of review has been approved by a fully informed, uncoerced majority of the disinterested stockholders.”[i] On March 31, 2017, in In re Saba Software, Inc. Stockholder Litigation, the Delaware Chancery Court determined, for the first time, that a transaction did not satisfy the Corwin standard.[ii] Although Saba addresses unique facts, … Read more
After almost every major financial-reporting scandal, news stories and congressional speeches inevitably follow, detailing how corporate culture encouraged and enabled fraud. For example, in September 2016, Wells Fargo CEO John Stumpf testified before the House Financial Services Committee regarding the bank’s phony accounts scandal. The bipartisan outrage was captured by Representative Mike Capuano of Massachusetts: “You… have run an enterprise that has a culture of corruption. You encourage subordinates to abuse existing customers by opening fake bank accounts. You charge those victims illegal fees, interest, and late charges, and then you send some to collection agencies because they didn’t pay
Although the Trump administration has announced only one of its selections for top positions at the Antitrust Division of the U.S. Department of Justice (“DOJ”) or the Federal Trade Commission (“FTC”), the election of President Donald J. Trump sets the stage for a potentially significant recalibration of federal antitrust enforcement by the U.S. agencies.
Republican administrations historically have taken a less interventionist approach to antitrust enforcement than their Democratic counterparts, and the Trump administration has an unprecedented opportunity to shape antitrust policy through several key appointments.
Still, many of President Donald Trump’s policy positions have not tracked traditional Republican paradigms, … Read more
Global M&A activity in March 2017 was generally stronger than in February and also outperformed U.S. activity, where a decline in average deal size overshadowed an increase in the number of deals. Globally, total deal volume, as measured by dollar value, increased by 47.3% to $299.58 billion, whereas in the U.S., a decrease in average deal size led to a 38.7% decrease in total dollar volume to $65.91 billion. The decrease in U.S. volume came despite a 2.9% increase in number of deals to 886, which was not as strong as globally, where the number of deals increased by 15.6% … Read more