Throughout the 1990s, the Big 5 accounting firms made a concerted effort to enter the legal services market. By the close of the twentieth century, legal networks directly owned or closely affiliated with the Big 5 were major players in many markets around the world, and were threatening to enter those like the United States from which they were still barred. However, after the wave of accounting scandals arising out of the 2001 financial crises—scandals that brought down Arthur Andersen and ushered in regulatory reforms in the United States and other major economies that appeared to place severe restrictions on … Read more
For most of the 20th Century, Eastman Kodak Company (often referred to simply as Kodak) was one of the most recognizable brands in the world. Founded in 1888, Kodak dominated the film and camera markets — in 1976, Kodak had 90% of the film market and 85% of the camera market in the United States. The phrase “a Kodak moment” — describing an event in one’s life that needed to be captured on film for posterity — became a common part of the American lexicon.
However, by the mid-2000s, Kodak was reeling. Although it had built a significant … Read more
In a recent article prepared for the ABA’s National Institute on Class Actions, which is now posted on SSRN (available here), I and Professor Alexandra Lahav survey recent class action developments, and I focus particularly on the special case of securities litigation. Here, a unique and problematic feature of securities litigation is the frequent reliance placed by plaintiff’s counsel on confidential witnesses. Nowhere else does one regularly encounter detailed complaints that cite as many as 20 or more confidential witnesses (listed in order as CW-1, CW-2, CW-3, etc.), most describing damaging admissions allegedly made to these unnamed witnesses … Read more
Global M&A activity declined in August 2017, with total deal volume, as measured by dollar value, decreasing 4.0% to $277.65 billion and the number of deals decreasing 5.6% to 3,119. The U.S. remained a bright spot in the M&A market, however, with mostly gains from July levels. In the U.S., total deal volume increased by 38.1% to $130.26 billion and the number of deals increased by 12.8% to 838.
Strategic vs. Sponsor Activity
In the U.S., strategic deal volume increased 29.3% to $78.12 billion, and the number of deals rose 8.7% to 673. By comparison, global strategic deal volume increased … Read more
Over the past few decades, the ownership of public corporations has been turned on its head. While private individuals owned approximately two-thirds of U.S. equities in 1970, today it is institutional investors like Blackrock, Vanguard, and State Street that control two-thirds of such shares. This increase in institutional assets, often referred to as fiduciary capitalism or mutual fund capitalism, came with the rise of pension funds and mutual funds. More recently, the popularity of Exchange Traded Funds (ETFs) has shifted assets from active to passive investment strategies. In a recent paper, available here, I explain how these changes in … Read more
Many institutional investors have made increasing the diversity of corporate boards a priority, yet activist investors that rely on the support of these institutional investors often make boards less diverse. Boards should take advantage of this divergence between the priorities of institutional investors and the actions of activist investors in resisting activist campaigns, and prepare for those campaigns by increasing board diversity.
Activists’ Effect on Board Diversity
The financial press has highlighted how activists reduce board diversity,  and a recent white paper by ISS and the Investor Responsibility Research Center Institute (“IRRCi”) has provided proof. The ISS and … Read more
As we approach the start of the 2018 proxy season, developments since January 2015 prompt a brief review of the state of play.
- There has been no slowdown in the U.S.; there has been a significant increase in other countries.
- Perhaps the most cogent description of what can be expected is contained in a must-read Bloomberg article, “The World’s Most Feared Investor”. “Aggressive, tenacious and litigious to a fault, Paul Singer may be the most feared activist investor in the world—by hedge fund rivals, companies and even countries. Singer’s Elliott Management Corp., which manages $34 billion of
The Dodd-Frank Act’s worthy objectives were to improve the safety, resilience, efficiency, and transparency of our financial system. Yet the law has drastically diminished the credit available to low-income Americans – the very people it was supposed to help. Equally important, community banks, which service disproportionately large shares of agricultural, residential mortgage, and small business loans, have been particularly adversely affected by Dodd-Frank. Specifically, since Dodd-Frank, there are 2,400 fewer small banks and community bank small business lending has dropped 21 percent. The CHOICE Act, recently passed by the U.S. House of Representatives, attempts to address many of these shortcomings.… Read more
On July 27 of this year, Andrew Bailey, chief executive of the UK Financial Conduct Authority (FCA), delivered a speech in which he questioned the sustainability of the London Interbank Offered Rate (LIBOR) in its current form. The FCA has regulated LIBOR since April 2013 and while significant improvements have been made to LIBOR during that time, the continuing decline in liquidity in interbank unsecured funding markets has undermined confidence in the reliability of LIBOR. The message, in essence, is that the underlying market is not robust enough to allow the determination of LIBOR to be based on actual transactions. … Read more
A securities class action is a complex event characterized by scarce information, high uncertainty, and increased information asymmetry between stakeholders and firms. In our paper “The Effect of Investor Attention on Fraud Discovery and Value Loss in Securities Class Action Litigation,” we argue that investor attention helps to disseminate information regarding fraudulent activity and to shape the market’s reaction to the lawsuit filing. Specifically, we find that higher investor attention improves learning about fraudulent activity and exacerbates the negative effect of the litigation event. As more investors learn about fraudulent activity, the negative effect of litigation on a firm’s reputational … Read more
Recently, in In re Martha Stewart Living Omnimedia, Inc. Stockholder Litigation, in an opinion by Vice Chancellor Slights, the Delaware Court of Chancery extended the Kahn v. M&F Worldwide roadmap for invoking business judgment review in controller buyouts to third-party transactions where the controller acts as a seller only, but is purported to receive disparate consideration. Under the roadmap, the court found that the sale of Martha Stewart Living Omnimedia, Inc. (“MSLO”) to Sequential Brands Group, Inc. satisfied M&F Worldwide’s requirements to invoke business judgement review, and because plaintiffs did not plead a claim for waste, their claims … Read more
There are two starkly different sides to the heated debate over staggered boards. On one are those who argue, based in part on work by Professors Lucian Bebchuk and Alma Cohen, that the staggered board is value decreasing because it enables the entrenchment of inefficient directors and management. On the other side are proponents of the exact opposite argument, based in part on work by Professors Martijn Cremers, Lubomir Litov, and Simone Sepe and on the views of lawyer Martin Lipton, that the staggered board increases firm value because it allows directors to bargain for higher takeover premiums and to … Read more
The Federal Reserve’s proposed supervisory guidance on corporate governance is a breath of fresh air that should encourage banking boards to focus on their core responsibilities and avoid blurring the distinctions between executive and non-executive duties. It is also a signal that supervisors intend to move away from the blunt “check-the-box” approach to corporate governance that has especially burdened banking boards in recent years. We applaud this rebalancing in supervisory approach.
The following comments on this positive development are offered in the hope that the guidance, when finalized and as implemented, will avoid an overly prescriptive, “one-size-fits-all” approach.
On 29 August 2017, the UK Government published its response to the green paper on corporate governance reform that it issued at the end of November 2016. It intends to implement its reform proposals — so that they apply to accounting periods starting after June 2018 — by a mixture of secondary legislation and changes to the UK Corporate Governance Code (the “Governance Code”) coupled with the preparation of new guidance and certain other initiatives in related areas. Except for foreign premium-listed companies which may be affected by the Governance Code changes, the reforms (including the CEO pay ratio reporting) … Read more
A central goal of corporate law is to make managers accountable to shareholders. So it may come as a surprise that America’s federal government frequently compels companies to “effectively exclude the Shareholder from . . . influence over the Corporation’s business or management [.]” Indeed, there is a federal agency whose principal is to ask companies to entrench the board of directors, waive the duty of loyalty, and hire individuals with little business experience to run the company.
That agency is located in the Pentagon. The managers hired and entrenched are former spies, military officers, and law enforcement officials. … Read more
On August 23, 2017, the Second Circuit issued its second significant decision on insider trading liability in the past three years, United States v. Martoma. In its 2014 decision in United States v. Newman, the Second Circuit limited the circumstances in which the government could prove insider trading on evidence that someone privy to inside information (a tipper) passed that information to another person (a tippee) who then traded on the information. Last year, the US Supreme Court’s decision in United States v. Salman called into doubt some of the limits imposed in Newman, but the scope … Read more
The dramatic escalation in enforcement activity by federal agencies against large financial institutions since the financial crisis is well known. These days the latest multi-billion dollar deal between regulators and Wall Street banks has lost blockbuster status and hardly even makes front page news. In my forthcoming article, Regulation by Settlement, I take stock of the broader significance of this development for both the financial system and the regulatory process. The main claim is that settlements have emerged as a primary tool for setting policy in financial regulation.
“Regulation by settlement” refers to a specific enforcement tactic that has … Read more
The capstone of regulatory reform in the wake of the financial crisis can be characterized as an effort to change the financial industry by getting bankers to behave more ethically. Regulators have emphasized the importance of “culture” set by a “tone at the top” that makes “ethical conduct” a primary organizational value—though they have not given much content to any of these terms.
Janet Yellen, chair of the Federal Reserve Board, has said: “[W]e expect the firms we oversee to follow the law and to operate in an ethical manner. Too often in recent years, bankers at large institutions have … Read more
Since the June 8 election in Britain, which saw the Prime Minister lose her majority in Parliament, there has been much speculation as to whether the British government would continue down the road of a “hard” Brexit or would move to a softer version of the “no deal is better than a bad deal” position that dominated the headlines for much of the spring. In the past few weeks, while continental Europe focused on other issues and vacations, the political class and the media in Britain were left to read between the lines as competing visions of Brexit, with a … Read more
On August 3, the Federal Reserve (Fed) proposed for comment a new supervisory rating system to assess the safety and soundness of Large Financial Institutions (LFIs).1 This is the first change to the Fed’s supervisory rating system since the financial crisis, and aims to simplify and clarify the existing five-component supervisory assessment process2 by assigning ratings across three pillars: (1) capital, (2) liquidity, and (3) the effectiveness of governance and controls.
1. Doubling down on capital and liquidity. The proposal is designed to focus future ratings on two areas where the Fed has made the most changes … Read more
In July 2017, Dow Jones, goaded by the reaction to Snapchat having gone public with a class of shares without voting rights, announced that, after extensive consultation, it had decided to henceforth eliminate companies with dual-class shares from its indices, in particular the S&P 500 Index.
Over the last 10 years, putting money in passive index funds has become a popular form of investment. An index fund is a pool of money invested in a way that is proportional to the composition of an overall index, the S&P 500 being the most popular. Already in 2016, index funds managed … Read more
Since the CFPB issued its Arbitration Rule in July, most commentators have focused on ways the rule may be blocked from going into effect. Chief among these is the possibility that Congress will vote to overturn the rule under the Congressional Review Act, and the House did promptly vote in favor of overturning the rule on July 26, 2017. The Senate began its August recess without a vote to overturn the CFPB Arbitration Rule and with no indication for when it might take the matter up again. In light of that uncertainty, it is now time for financial institutions to … Read more
Prominent activist investors such as hedge funds, pension funds, and influential individual shareholders and families increasingly aim to reshape corporate policies and strategy. In our paper “Shareholder Engagement on Environmental, Social, and Governance Performance”, we use a proprietary dataset covering 660 companies globally over 2005-2014 to study investor activism promoting environmental, social, and governance (ESG).
In the past two decades, socially responsible investing (SRI) has grown from niche to mainstream. The 2015 report of the UN Principles for Responsible Investing indicates that a large number of institutions (managing about $59 trillion) have endorsed these investing principles, thereby declaring … Read more
Publications like Bloomberg, The Financial Times, and The Wall Street Journal have recently reported that current stock markets and especially those in the United States are more overvalued than ever. In an interview with the Financial Post, David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates Inc., added that U.S. stocks are “supremely overvalued.” This suggests that a period of gloom might be closer than anticipated. There is, in fact, good reason for investors to be concerned. In terms of price earnings ratios, the S&P 500 Index has been trading at an … Read more
Recently, the Securities and Exchange Commission (the “SEC”) issued two publications relating to initial coin offerings, or “ICOs”: The SEC’s Office of Investor Education and Advocacy published an investor bulletin1 (the “Investor Bulletin”) highlighting the risks of ICO investing and providing guidance for potential investors before investing in an ICO, and the SEC’s Division of Enforcement (the “Division”) issued a report of investigation2 (the “Report”) concluding that an issuance of tokens by a virtual organization in its ICO may have violated U.S. federal securities laws. Both the Investor Bulletin and the Report address the possibility that an offering … Read more
Plans to end the long reign of the London Interbank Offered Rate (LIBOR) as one of the world’s most often-used interest rate benchmarks have recently been confirmed by several top financial regulators. On July 27, 2017, Andrew Bailey, chief executive of the U.K. Financial Conduct Authority (FCA), announced that LIBOR is to be transitioned to alternative rates during the next four years,1 marking a sharp departure from the FCA’s prior recommendation to reform the benchmark.2 Less than a week later, J. Christopher Giancarlo, chairman of the U.S. Commodity Futures Trading Commission (CFTC), and Jerome Powell, a governor of … Read more
On August 3, the Federal Reserve (Fed) proposed for comment supervisory guidance for boards
of directors of Fed-supervised institutions1 (i.e., Board Effectiveness (BE) guidance). The proposed BE guidance is the result of a multi-year review by the Fed of existing guidance and practices of boards of directors across supervised firms. It is intended to consolidate and replace existing board supervisory expectations from 27 SR Letters, which include 170 supervisory expectations for boards, with 33 expectations of effective boards. The 33 proposed expectations are categorized into five attributes which the Fed intends to assess a firm’s board of directors, including: … Read more
On Wednesday, August 2, 2017, President Donald Trump signed into law the Countering America’s Adversaries Through Sanctions Act (the Act). The Act significantly expands and codifies US sanctions targeting Russia, and it adds several measures to the already comprehensive US sanctions on Iran and North Korea. The Act passed both houses of Congress last week, with a vote of 419-3 in the House of Representatives and 98-2 in the Senate.
The Act is particularly significant because it codifies many of the Russia-related sanctions measures introduced by President Obama through executive orders, effectively requiring President Trump to secure Congressional approval before … Read more
Financial crises and corporate scandals like those involving Enron, Worldcom, or Fannie Mae have triggered increased academic research into the probability of stock price crashes. Stock price crashes have a material impact on investor welfare, and so are of interest to investors making portfolio investment decisions. By understanding the factors that determine the variations in crash risk, investors can better predict and avoid future stock price crashes. In a recent paper, we examine whether and how financial constraints on companies affect the risk that their stock prices will crash. We define, per Lamont et al. (2001), financial constraints as frictions … Read more
The S&P Dow Jones and FTSE Russell indices recently took actions designed to exclude companies with multi-class share structures from several of the most prominent market indices.
On July 31, S&P Dow Jones announced that companies with multi-class share structures will no longer be eligible to be added to the S&P 500, the S&P MidCap 400 or the S&P SmallCap 600. Existing companies included in these indices will not be affected by this change. Companies with multiple share classes or with classes having limited or no voting rights will remain eligible for inclusion in the S&P Global BMI Indices and … Read more
An August 21 blog post, “Shareholders Deserve Right to Choose Mandatory Arbitration,” by Professor Hal S. Scott, argues that the introduction of mandatory arbitration clauses into corporate charters would be good for stockholders. Nothing could be further from the truth.
Professor Scott argues that the current system of federal oversight is sufficient to inhibit and remedy corporate fraud. He states that he is in favor of “shareholders’ right to opt out of the costly and ineffective system of securities class action litigation…” and that mandatory arbitration will be more effective to redress corporate fraud. The facts contradict all of these … Read more
Global and U.S. M&A activity in July 2017 increased in total deal value, despite a decline in the number of deals. Globally, total deal volume by dollar value increased by 14.6% to $303.85 billion, while the number of deals decreased by 8.9% to 3,029. Similarly, in the U.S., total deal volume by dollar value increased by 13.1% to $108.99 billion, while the number of deals decreased by 9.6% to a 12-month low of 644.
Strategic vs. Sponsor Activity
Strategic activity drove the market, with strategic deal volume, as measured by dollar value, increasing by 14.8% to $213.90 billion globally and … Read more
Scholars and politicians alike have spoken and written at great length about the importance of gatekeepers in our current corporate governance system. However, relatively little has been done to discipline gatekeepers who seem to have lost the keys to the gate. Meanwhile, the country’s primary securities regulator, the Securities and Exchange Commission, refuses to employ one of its most powerful tools to keep gatekeepers in check. Our recent article, Laxity at the Gates: The SEC’s Neglect to Enforce Control Person Liability, examines the SEC’s reluctance to bring claims against corporate insiders under Section 20(a) of the Securities Exchange … Read more
The May 2017 WannaCry ransomware attack affected more than 200,000 computers spread across 150 nations. The results of the attack made clear that computers whose software is not up to date can hurt not only the computers’ owners, but ultimately the larger internet ecosystem. This fact was brought into harsh relief a month later, when perpetrators of the NotPetya attack used the same vulnerability as WannaCry.
Spurred on by such attacks, more firms are viewing cybersecurity as essential to corporate social responsibility (CSR). Some contend that cybersecurity promotes human rights, on and offline, by protecting privacy, free expression, and the … Read more
This update provides an overview of key class action developments during the second quarter of 2017 (April through June):
- Part I explores a significant decision from the Supreme Court concerning defeating novel attempts by plaintiffs to obtain appellate review of denials of class certification.
- Part II addresses rulings from the Supreme Court and Ninth Circuit regarding the breadth of the American Pipe tolling doctrine for statutes of limitations in class actions.
- Part III analyzes recent decisions interpreting and applying the Supreme Court’s Article III standing decision in Spokeo, Inc. v. Robins.
- Part IV discusses noteworthy rulings interpreting the Class
On July 17, SEC Commissioner Michael Piwowar extended an important invitation to U.S. public companies. “For shareholder lawsuits,” Piwowar offered, “companies can come to [the SEC] to ask for relief to put… mandatory arbitration into their charters.” To some, this idea may be unfamiliar or even controversial. But, as someone who has studied the U.S. securities class action system and its impact on our capital markets extensively, I know this policy is a sound one that serves U.S. investors and markets well.
Indeed, the Committee on Capital Markets Regulation, which I direct, first introduced the idea of corporation-stockholder non-class arbitration … Read more
Fraud incidents have increased by over 130 percent in the past year, resulting in significant monetary and reputational losses for financial institutions. Many of these incidents — including high-profile crimes such as the Society for Worldwide Interbank Financial Telecommunication (“SWIFT”) attacks from last year — involved the exploitation of governance deficiencies and ineffective operating models.1
Maintaining proper governance for risk management has been a major point of focus for industry groups and regulators, including the Office of the Comptroller of the Currency, the Basel Committee on Banking Supervision, the Committee of Sponsoring Organizations of the Treadway Commission, and the … Read more
An over-the-counter (OTC) market and an open limit order book (LOB) market are the two common mechanisms for organizing financial markets. An OTC is a decentralized market, where trades occur only through dealers. The dealers’ quotes are not fully transparent and are not binding, so customers can shop around and negotiate for the price. An open LOB is a centralized market, where traders submit anonymous orders to a central order book. The quotes are transparent and binding, traders can trade among themselves, and the transactions are transparent as well.
Corporate bonds are traded worldwide mostly in OTC markets while stocks … Read more
Brexit has set the stage for a retaliatory trade war that neither the U.K. nor the E.U. wants and that will injure consumers (and others) on both sides. Moreover, it could threaten the U.S. as well, if it leads the U.K. to relax its financial regulatory requirements and return to its former “regulatory-lite” policies in order to compete more effectively (and thereby lead a regulatory race to the bottom).
On August 7, 2017, the U.S. Court of Appeals for the Seventh Circuit unanimously upheld Michael Coscia’s conviction on spoofing and commodities fraud charges in United States v. Coscia, No. 16-3017 (KFR), 2017 WL 3381433 (7th Cir. Aug. 7, 2017), rejecting Coscia’s constitutional challenge to the anti-spoofing statutory provision and finding Coscia’s conviction adequately supported by the evidence and testimony adduced at trial.
Coscia was the first trader to be convicted under the anti-spoofing provision of the Commodity Exchange Act (“CEA”), 7 U.S.C. § 6c(a)(5). The Seventh Circuit’s decision upholding Coscia’s conviction marks the first time a federal appellate … Read more
It’s time to exempt a certain type of hostile bid – an all-cash, all-shares tender offer – from a poison pill defense. In essence, I propose a statutory rule requiring a board to remain neutral in the face of such an offer unless the company’s certificate of incorporation allows otherwise. This would be similar to but less general than Rule 21 of the UK’s Takeover Code.
Argument for Change
Few research topics over the last two decades have proven as alluring and elusive as corporate governance. Its allure is self-evident: Since the turn of the 21st century, a growing number of pundits, commentators, and scholars have argued that high quality corporate governance matters in creating and preserving firm value. And accordingly, various courts, legislatures, regulators, and boards of directors have introduced a host of governance reforms in response. Yet the topic is also elusive, largely because corporate governance operates through a wide variety of means, including the financial structure of a company, economic incentives, monitoring, formal authority, real authority, … Read more
Although a bedrock of the financial markets for over 30 years, LIBOR has been under pressure ever since the Wheatley Review, and a speech given by Andrew Bailey, Chief Executive of the UK’s Financial Conduct Authority (FCA) on July 27th heralds its potential demise. Market participants need to prepare for the possible transition away from LIBOR by the end of 2021. This briefing explains why and assesses the practical and documentary implications for the US market.
- UK regulatory support for LIBOR is likely to be withdrawn by the end of 2021.
- The development of suitable alternatives for
The recently released public sections of the 2017 resolution plans submitted by the eight US global systemically important banks (G-SIBs)1 provide a unique window into the banks’ resolution planning efforts that have developed over the last five years. Notably, the 2017 plans not only describe how the banks have enhanced their resolution plans but also highlight improvement in their intrinsic resolvability, which is indicative of the mindset change that has evolved over the past seven years: resolution planning has developed from a one-time compliance “project” to an important strategic consideration for business-as-usual (BAU) financial and operational choices.
These fifth… Read more
A recent decision issued by the United States District Court for the District of Massachusetts, Harrington v. Tetraphase Pharmaceuticals, Inc., highlights the value of established trading plans in defending against securities fraud allegations. These trading plans, which are established pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, are not absolute defenses, but do offer corporate directors and officers (“insiders”) a greater level of protection in the event they purchase or sell company shares during the putative class period of a subsequent securities litigation. There are, however, several factors to consider in deciding whether a 10b5-1 … Read more
Following the recommendations of the Basel Committee on Banking Supervision, most financial systems around the world have imposed new capital requirements for banks in recent years. These moves seem to be justified on two powerful economic grounds. First, better capitalized banks promote financial stability by reducing banks’ incentives to take risks and increasing banks’ buffers against losses. Second, lack of compliance with a set of rules established by an internationally recognized institution such as the Basel Committee may harm confidence in a country´s financial system.
More than 8,000 domestic equity securities were publicly traded in the U.S. over-the-counter (OTC) market in 2010. Yet, research studying this market is limited. On the one hand, the OTC market attracts stocks of firms that tend to be small and growing. On the other hand, it generally offers investors less protection than the traditional exchanges do, and fraudulent and abusive practices in this market can cause significant economic harm to investors. Thus, the OTC market illustrates the trade-off that securities regulators face between ensuring investor protection and creating a viable market for small growth firms. This trade-off has come … Read more