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
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
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
In April of 2012, President Obama signed into the law the J.O.B.S. (Jumpstart Our Business Startups) Act. The law’s intent and design was to make it easier for small businesses to raise money by easing their regulatory burdens both on raising capital and operating as publicly traded companies on an ongoing basis. This article focuses on the J.O.B.S Act’s Title IV. Title IV revises an exempt offering provision referred to as Regulation A. Prior to its revision, Regulation A was a seldom used offering exemption because companies felt that the steps necessary to complete a Regulation A offering far outweighed … Read more
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
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
Work/life balance has been described as the issue of our age, but attainment of a balance, or the ‘good life’, is increasingly elusive. This is borne out by a study of Australian male and female corporate lawyers, the findings from which are explored in my recently-published article, “Work/Life or Work/Work? Corporate Legal Practice in the Twenty-First Century.”
Following the global financial crisis, a desire for capital accumulation led to the amalgamation of many of Australia’s largest national firms with elite northern hemisphere firms. The preoccupation with profitmaking in these global firms has seen the aggressive embrace of the long-hours … Read more
Whether one ascribes to the agency theory of shareholder primacy or the contractarian theory of director primacy, boards of directors have great discretion in determining whether, when, and how to sell the corporation. Defensive tactics, like poison pills, can be tools in wielding that discretion in the service of creating shareholder value. However, a poison pill designed either to oppress a minority shareholder, as in eBay v. Newmark, or to minimize the impact of activist shareholders, as in Versata Enterprises, Inc. v. Selectica, Inc., seems to exceed the “maximum dosage” of the pill. The “tax benefits preservation … Read more
To achieve a growing number of public, social, civic goals, we draw on the power of financial markets. Parents who can afford to save for the cost of their children’s college education rely on the market when they put money into college savings plans like New York’s 529 College Savings Program, for example, and so do workers counting on pension funds to provide income in retirement.
As long as these investments produce the needed return, all is well, but when they do not, they undermine the public end they were supposed to serve. The riskiness of investments made in service … Read more
Because most outsiders learn about a firm from news articles written about it, firms have incentives to manage how they are covered by media so that they are presented in the most favorable light possible. Our study examines whether the composition of a firm’s board of directors affect the way the firm is covered by media. Specifically, we investigate whether a board member with media expertise enhances the firm’s ability to manage how the firm is portrayed in the news.
We define an individual with past experience in a news organization as an owner, top executive, board member, editor, journalist, … Read more
A corporate inversion involves the relocation of a corporation’s legal domicile to a lower-tax nation (host country) while retaining its material operations in its higher-tax country of origin (home country). Corporations have been engaging in inversions for over three decades. The first inversion in 1982 occurred when Louisiana-based construction firm McDermott International converted one of its cash-rich Panama-based subsidiaries into the new parent firm, thereby paying much lower income taxes.
Corporate inversions have become headline news again in the US. Last year, US-based pharmaceutical company Pfizer announced a merger with Ireland-based Allergan. Pfizer expected to reduce its effective tax rate … Read more
Regulators demand the impossible when they require issuers to design and implement an effective compliance program to guard against insider trading, a crime that neither Congress nor the SEC has defined with any specificity. This problem is then compounded by the threat of heavy civil and criminal sanctions for noncompliance. Placed between this rock and hard place, issuers adopt over-broad insider trading compliance programs that come at a heavy price in terms of corporate culture, cost of compensation, share liquidity, and cost of capital. The irony is that, since all of these costs are passed along to the shareholders, insider … Read more
There has been a recent surge in scholarship on the issue of concentration of power in the CEO, and the subsequent consequences for shareholder wealth maximization and board primacy. There is a general consensus among scholars that, in general, more powerful CEOs (relative to the board as representative of the corporate shareholders) can exacerbate agency conflict, resulting in suboptimal corporate strategies that are detrimental to corporate performance, and as a result, damaging to shareholder interests as well. The basic cause of this excessive power with CEOs lies in the outside board members being dependent on the CEO for their selection, … Read more
The equitable doctrine in pari delicto provides that a plaintiff who participated equally with a defendant in wrongdoing cannot pursue a claim against the defendant. In pari delicto is a shortened version of the phrase in pari delicto potior est conditio defendantis, which means “[i]n a case of equal or mutual fault . . . the position of the [defending] party . . . is the better one.”
Lawyers invoke in pari delicto when sued for malpractice for failing to protect a client from legal liability. A common scenario involves a lawyer advising a client to lie under oath; … Read more
In our recent paper forthcoming in The Financial Review (2016), we highlight the role of venture capital (VC) in spawning new ventures. That is, after acquisitions, IPOs and other successful exits, entrepreneurs backed by venture capitalists (VCs) tend to form new companies or become angels coaching and investing in entrepreneurs. In our recent paper, we examine for the first time the specific conditions under which entrepreneurs actually stick with entrepreneurship in the form of starting a new company or becoming an angel. We address the question of when does entrepreneurial finance spawn the creation of new ventures by examining detailed … Read more
Global business puts pressure on geographically limited courts. U.S. courts, for instance, can reach only defendants with contacts with the forum territory, usually the specific U.S. state in which the court is located. But litigation may be brought against part of a multinational business that has separately organized entities in different countries. Often the local subsidiary has direct contacts, but the plaintiffs want to sue the absent parent as well. Can they? The somewhat unsatisfactory answer is that it depends. Often it depends on whether the local subsidiary’s contacts with the forum territory “count” as those of the parent company. … Read more
Corporate governance scholarship has long considered the problems that arise in public companies with dispersed ownership. But the automaker Volkswagen does not suffer from a dispersed ownership structure. In fact, it has several strong and highly active owners. The Porsche and Piëch families have been involved with the company for many years and own 31.5% of Volkswagen’s equity. The German state where the company is headquartered, Lower Saxony, holds 12.4%, and an outside investor, Qatar Holding, owns 15.4%. With such powerful economic incentives in not one but three actors, management should have been subject to the kind of exacting oversight … Read more
Last week, the Basel Committee on Banking Supervision (Basel) proposed floors and other constraints on the use of internal models for calculating credit risk capital. The proposal aims to reduce complexity and variation in the calculation of regulatory capital among banking institutions, thus improving comparability. To that end, the proposal generally discourages (and in some instances prohibits) the use of internal ratings-based (IRB) approaches in calculating risk weighted assets (RWA) related to credit risk. The proposal’s objective is consistent with Basel’s other recent issuances, i.e., the re-proposed standardized approach for credit risk (issued last December),1 revised final capital requirements … Read more
In a recent paper, I considered the strength of securities fraud charges asserted in several computer hacker cases filed in mid-2015. Some of the defendants in the cases were the hackers who used computer methods to obtain unauthorized access to corporate press releases before they were released to the public. Other defendants were the traders who paid for the stolen information and used it to buy and sell securities. The press cast the scheme as an insider trading ring tied to computer hackers, but the SEC and criminal authorities asserted general securities fraud charges under Rule 10b-5.… Read more
Hedge fund activism is the latest rave in corporate governance. Activist hedge funds build stakes in target firms in order to press management for various changes. When managers are uncooperative, they may just be forced to step down. Lest you think only managers of small, not well-established firms have reason to fear, some of the most powerful managers in corporate America, for example the CEOs of Bob Evans, Hertz, Sotheby’s, Yahoo, etc., have all failed to avoid such fate. It appears that no firm is immune to the threat of HFA.
Managers, needless to say, have great incentive to avoid … Read more
Congress expanded the SEC’s ability to pursue enforcement actions in administrative proceedings in the Dodd Frank Act, bringing the agency’s use of proceedings before its own administrative law judges (ALJs) into the spotlight. A number of respondents have challenged the constitutionality of these proceedings, relying principally on arguments arising out of the Appointments Clause of the Constitution. Those disputes are currently being played out both before the SEC and in the courts, but they are unlikely to be a long-term obstacle to the SEC’s use of administrative proceedings.
Just six months ago, when the Supreme Court’s current term opened in October, things looked bleak for the class action. Three major cases were on the Court’s docket, and each seemed handpicked as a vehicle for the Court’s conservatives to curb the availability of the class action. Nonetheless, it has now become clear that this assault has fallen short. The high water mark in this hostile tide was probably reached in 2011 when the Court decided both Wal-Mart Stores, Inc. v. Dukes and AT&T Mobility LLC v. Concepcion. In these cases, the Court both tightened the standards … Read more
Options backdating? Who would be so arrogant to be still backdating their options? It has been exactly ten years since the Wall Street Journal’s exposé on “lucky CEOs.” The intriguing question though is whether the executives could resist temptation for ten years. We decided to find out. We find that despite all the reforms enacted in response to the backdating scandal of 2006, manipulation of stock options as a form of incentive compensation is once again alive and well.
Let’s digress and explain the background first. Backdating an option refers to the practice of fraudulently picking a date in … Read more
The ‘Twin Peaks’ method of financial system regulation is widely regarded as the leading model for the regulation of a country’s financial system. Australia was the first to adopt the model in 1997, has been using it the longest, and fared the best among the G20 during the global financial crisis. As a result, Australia’s Twin Peaks model is being exported around the globe.
The model was first proposed by an Englishman, Dr Michael Taylor, in 1994. So-called because it proposes two, specialist, mega-regulators: one charged with the maintenance of financial system stability (ensuring banks don’t end-up bankrupt), and … Read more
Ever since the SEC adopted Rule 10b5-1in 2000 the rule has been the subject of controversy. Some have questioned its validity, others have claimed that it has been abused. The commentary that follows addresses one suspected abuse of Rule 10b5-1, whether persons who have created plans under Rule 10b5-1 and then time corporate disclosure to improve trading outcomes under those plans have violated the law.
The SEC’s position is that a trade made when an insider is in possession of material nonpublic information (MNPI) about the company is unlawful under the classical theory of insider trading. Rule 10b5-1 was designed … Read more
On January 7th 2016, Thomson Reuters and the National Venture Capital Association (NVCA) published their Exit Poll Report, which stated that in the U.S. 77 venture capital (VC)-backed initial public offerings (IPOs) raised $9.4 billion in 2015. Over the same period, 93 non-VC-backed U.S. companies went public, raising $23.9 billion (Ernest & Young – IPO Global Trends 2015). For experts in the field of VC investments these numbers cannot appear surprising: the contribution by VCs to the growth of American stock exchanges is a well-documented phenomenon (e.g., Megginson and Weiss, 1991; Lee and Wahal, 2004; Nahata, 2008). … Read more
The “meh” economy that accounts for some of the sourness in the American electorate is partly due to a design flaw in the US corporate governance system. One proffered diagnosis is that companies invest for the short term and are too quick to return cash to shareholders through stock repurchases. Why? It’s the attack of hedge funds, shareholder activists looking for short term gain even at the expense of investments that would produce higher returns over the long run, and, along the way, would lead to employment gains and then wage gains. What follows, then, is a prescription for changes … Read more
Columbia Law School is looking for an Editor-at-Large to oversee and administer the Columbia Law School Blue Sky Blog. The Blog, now completing its third year, has grown rapidly and become one of the most read sources of current information and opinion on corporate law, securities law, and financial regulatory issues, including white collar crime, enforcement, antitrust, restructuring and kindred topics. The Blog’s content presents legal developments and insights from a range of sources, including practitioners, academics and regulatory bodies. A new post is generally published at least once every weekday and the Blog also highlights important news developments in … Read more
A widely-held view in financial economics is that CEOs holding a non-diversified wealth portfolio tied to the firm are likely to be more risk-averse when making corporate decisions than what diversified shareholders would prefer. To reduce this divergence in attitude toward risk between CEOs and shareholders, equity-based compensation such as stock and stock option grants that offer payoff structures similar to what shareholders receive is often used in the CEOs compensation package. The purpose is to align the interests of CEOs with that of shareholders, and lead to corporate decisions consistent with shareholders’ interests.
In recent years, there has been … Read more
Why do we memorialize some bargains in dozens of related contracts, rather than just one? Mergers and acquisitions deals, for example, are often formed through constellations of agreements that I call “unbundled bargains.” At the center of an unbundled bargain, there is a heavily negotiated acquisition agreement. Surrounding it, there are dozens of ancillary agreements that buttress the deal.
In a paper forthcoming in the University of Pennsylvania Law Review, and available here, I argue that unbundled bargains help parties design better deals ex ante and enforce deals more effectively ex post. I also argue that recognizing deals … Read more
The world of corporate governance is undergoing two intense, inter-related debates. One is a debate as to whether profit-maximization in the short term is really different from profit-maximization in the long term, and if so whether American corporations are currently too short-termist. The second debate is whether shareholder profit maximization is and should be the exclusive goal for corporate managers. The debates are inter-related because corporations focused on long term rather than short term profits are likely to more fully take into account the interests of other stakeholders, although even a robust focus on the long term will not fully … Read more
Regulators seem to think so. In the Dodd-Frank Act, policymakers made an unprecedented move towards using securities regulation to address issues unrelated to the Securities and Exchange Commission’s (“SEC”) core mission of protecting investors and maintaining the fair and efficient functioning of financial markets. The Dodd-Frank Act requires financial statement dissemination of information regarding purchases of war minerals from Congo and mine health and safety performance. The objectives of these policies are noble—more than ten million people have died in Africa’s Great War and every year hundreds of workers are injured or killed in U.S. mines. Yet, can such regulation … Read more
To ensure compliance with disclosure and accounting requirements, the SEC periodically reviews reporting companies’ filings, including the Form 10-K. While the SEC is required to review the filings of every reporting company at least once every three years, it may (and does) choose to review some companies more frequently. For example, according to the SEC’s annual reports, the SEC has reviewed an increasing percentage of companies each year since 2006, with 52 percent of registered companies being reviewed in fiscal year 2013.
The Delaware Court of Chancery’s recently published opinion in Amalgamated Bank v. Yahoo!, Inc. (the “Opinion”) provides a reminder for directors about the importance of process in satisfying fiduciary duties when evaluating and approving executive compensation packages. In the Opinion, which deals with Amalgamated’s demand under Section 220 of the Delaware General Corporation Law to inspect certain books and records of Yahoo! in connection with the hiring and firing of its Chief Operating Officer, Vice Chancellor Laster discusses practices that should be routine in a board’s review of executive compensation proposals and highlights procedural pitfalls that have … Read more
Herd behavior is a widely used notion met in different contexts and disciplines, from neurology and zoology to sociology, psychology, economics and finance. In economics and finance the term herd behavior usually suggests the process where agents tend to imitate each other’s actions and/or base their decisions upon the actions of others. This behavior may not always indicate irrational agents. For instance, market participants may infer information from actions of previous participants, investors may react to the arrival of fundamental information or analysts and institutional investors may herd in order to protect their reputation. For example, Bikhchandani and Sharma (2001) … Read more
Today, in addition to our usual offering, we present three student posts from the Columbia Business Law Review:
- David Markewitz on The SEC’s Appointment Problem and Its Likely Solution;
- Penina Moisa on The Perils, Protections and Proliferation of Pre-IPO Options; and
- Abigail Hathaway on Buyer’s Remorse and “MAC Outs” in M&A Agreements.
With the passage of Section 929P(a) of the Dodd-Frank Act in 2010, the SEC saw the largest expansion of its administrative enforcement power to date. Prior to that, SEC administrative proceedings were limited to obtaining an order enjoining violations of the Exchange Act. Section 929P(a) amended this, authorizing the SEC to seek civil monetary penalties from “any person” in an administrative hearing.
While the SEC still brings a majority of its cases in federal courts—roughly 63 percent this fiscal year through June—a growing proportion of cases have been tried in its internal administrative tribunals, a trend the agency … Read more
Many would describe the era we are living in as a “startup bubble.” Not only has the number of startup companies increased dramatically, but many startups have also achieved record-breaking valuations. Alibaba, an e-commerce site, recently went public at a valuation of $21 billion, while Facebook’s IPO raised $16 billion. Yet experts say that 90% of startups fail, and even startups that do succeed often do so only after many years.
Many early startups don’t have enough capital to pay market rate salaries. To incentivize employees, many startup businesses give their employee “options” to receive shares in … Read more
Feeling some buyer’s remorse after your latest big purchase? Well, this happens to companies involved in multi-billion dollar mergers and acquisitions, too, in the time between signing an agreement and closing the deal. This is one reason that a material adverse change (“MAC”) clause is a standard feature in M&A agreements—to allow the buyer to exit the merger if certain adverse changes befall the target company, but to prevent the seller from backing out because it simply changed its mind. MAC clauses are a highly negotiated part of such agreements because they are the mechanism by which the buyer and … Read more
Culture is a potent force in shaping individual and group behavior, yet it has received scant attention in the context of financial risk management and the recent financial crisis. In my paper, The Gordon Gekko Effect: The Role of Culture in the Financial Industry, I propose a specific framework for analyzing culture in financial practices and institutions. Some cultural values are positively correlated to better economic outcomes. However, not all strong values are socially positive ones. Some corporate cultures may transmit negative values to their members in ways that make financial malfeasance significantly more likely. I propose calling these … Read more
In recent years, the stockholder’s appraisal remedy in Delaware has transformed from a little-noted feature of stock ownership to a potent option for dissenting shareholders. It’s also become a topic of heated debate. In our prior work, we have documented the recent increase in appraisal activity, largely driven by a group of specialist funds that have been called appraisal arbitrageurs. We have shown that these appraisal specialists focus their resources on a small number of transactions and that those transactions exhibit proxies for legal merit: abnormally low merger premia and insider involvement.
In § 1502 of Dodd-Frank, Congress instructed the SEC to draft rules requiring public companies to disclose their use of “conflict minerals” originating in and around the Democratic Republic of the Congo (DRC). Coined the Conflict Minerals Rule, the statute is based on the notion that investor accountability paves the way for socially conscious corporate behavior. The suspicion was that money from U.S. companies was flowing to warlord-controlled mines in the region and thereby fueling human rights abuses by such groups. The hope was that improved transparency ushered in by the Rule would cause companies to turn off the spigot.… Read more
Many prominent business executives and legal scholars are convinced that the American economy will suffer unless hedge fund activism with its perceived “short-termism” agenda is significantly restricted. Conversely, shareholder activists and their proponents claim they function as a “disciplinary mechanism” to provide management oversight and are instrumental in mitigating the potential agency conflict between managers and shareholders.
Earlier studies have shown that when institutional investors, particularly mutual funds and pension funds, follow an activist agenda, they do not achieve significant benefits for shareholders. Nevertheless, hedge funds have increasingly engaged in shareholder activism and management supervision that differs fundamentally from previous … Read more
The Duke Journal of Constitutional Law & Public Policy recently published a symposium issue on the implications of the Supreme Court’s decision in Halliburton Co. v. Erica P. John Fund, Inc. (“Halliburton II”). In my contribution, I discuss how the Court’s reasoning represents a compromise position that reveals the theoretical tensions that lie behind class certification doctrine.
In Basic Inc. v. Levinson, the Supreme Court endorsed the fraud on the market doctrine. That doctrine provides that when a security trades in an “efficient” market, plaintiffs bringing Section 10(b) claims gain the benefit of two … Read more
Many large firms – Google, Alibaba and Fitbit to name a few — have multiple voting share structures (MVS) in which the firm issues two or more classes of shares, one to the public and the other to insiders (typically founders, promoters, management, private investors or board members). The shares that are issued publicly have limited voting rights while the class issued to insiders carries more voting rights, allowing them to control the company. The one-to-one ratio of votes per share prevalent in non-MVS firms does not exist.
MVS undermine corporate governance standards because outside shareholders carry a disproportionate share … Read more
The Committee on Foreign Investment in the United States (CFIUS) is an interagency organization charged with identifying potential national security risks posed by foreign acquisitions of U.S. businesses and mitigating those risks as necessary. If CFIUS determines that the national security risks cannot be mitigated adequately, it recommends that the U.S. president block the transaction. CFIUS’s authority extends both to proposed transactions and to transactions that have already been completed.
On February 19, 2016, CFIUS issued the unclassified version of its annual report to Congress. The report, which focuses on CFIUS activity during calendar year 2014, identifies key developments relating … Read more
Until 1870, corporate elections in the United States were generally conducted under a system of straight voting. In that year, the State of Illinois adopted a new constitution requiring that cumulative voting be used to elect directors to the boards of Illinois corporations. Over the next eighty years, a number of states followed suit and adopted laws mandating the use of cumulative voting in corporate elections. As one scholar has written:
The high water mark of mandatory cumulative voting as a force in American corporate law was probably the late 1940s. At that point, twenty-two states had mandatory provisions. The … Read more
Policing is on a lot of minds these days. Liability insurance is probably not. But insurance bears on policing far more than one might think. Municipalities nationwide purchase insurance to indemnify themselves against liability for the acts of their law enforcement officers. The policies are broad, often covering punitive damages and intentional acts like assault and battery and discrimination. This arrangement creates a potentially serious moral hazard problem, but it also positions insurers, in the name of “loss prevention,” to act as “private regulators” of police activity. In my latest article, “How Private Insurers Regulate Public Police,” I present original … Read more
In the aftermath of the financial crisis of 2008-09 there was a widespread perception that the opacity of derivatives exposures held by major financial institutions contributed to the build-up of systemic risk. As a result, the G-20 leaders convened in 2009 in Pittsburgh and decided to reform derivatives markets, with a key ingredient of these reforms being the improvement of pre-trade transparency in these markets. The essence of this particular reform was that whoever wished to trade a derivative contract should be able to more easily observe and trade at the best available price. The United States implemented this reform … Read more