Deals, Activism, and SEC Regulation Get Lively Airing at M&A and Corporate Governance Conference

A host of top attorneys, judges, scholars, regulators, and advisers debated the latest issues in corporate and securities law on June 7 at a Columbia Law School conference in New York, offering cutting-edge thoughts on everything from cybersecurity to shareholder activism to the potential regulation of proxy advisers.

The day-long event featured a keynote conversation with U.S. Securities and Exchange Commissioner Robert J. Jackson, Jr., who among other topics discussed whether the SEC’s new Regulation Best Interest went far enough in protecting retail investors. Appearing on panels about M&A, Delaware law developments, and shareholder activism were the likes of Delaware Chancellor Andre Bouchard and Vice-Chancellor Kathaleen McCormick. At day’s end, Professor John C. Coffee, Jr., of Columbia Law School led a discussion on securities regulation.

In his keynote conversation with Columbia Law School Professor Joshua Mitts, Jackson acknowledged the “very contestable and difficult” questions raised by Regulation Best Interest, which the SEC adopted on June 5 to ensure that broker-dealers act in the best interest of retail customers when recommending securities investments. Jackson dissented from the rule, however, because it did not make “utterly unambiguous” that “investment professionals should be required by law to put their clients’ interests first,” he said.

He also criticized the commission for not making clear enough that the Investment Company Act of 1940 requires investment advisers to put clients first as well. He acknowledged his colleagues’ desire “to preserve access for investors,” but asked, “Access to what? Access to financial advisers who are confused about who comes first in this relationship?” He added that leaving any ambiguity about the duties of investment professionals invites “practices at the margin that don’t make much sense.” In any event, he predicted, regardless of what the SEC says, many advisers will commit to putting investors’ needs first, because “the market demands it.”

Jackson went on to discuss stock prices and the conflicts of interest created when exchanges offer relatively slow public feeds of stock prices while selling faster feeds to the likes of high-frequency traders. “That’s like letting Barnes & Noble run the public library and then being astonished when there are no books in the library…They have every powerful interest in making sure the library’s empty.” Jackson also addressed stock buybacks, the desire of boards for guidance on their obligations to prevent and disclose cyber-attacks, and potential reforms to the proxy-advisory process.

Later in the day, Professor Coffee convened an all-start panel to address the latest developments in securities regulation. Leading off was, again, Jackson, who continued his discussion of proxy-adviser regulation. He questioned the conflicts in advisers’ dual roles of advising corporate boards while also making voting recommendations to investors, the risks that regulation would “entrench incumbent” advisers in an already uncompetitive industry, and the wisdom of not allowing companies to challenge advisers’ criticisms of their actions. He also urged boards to explain more clearly the business reasons for excluding certain shareholder proposals from ballots, criticized a general lack of board diversity, and reiterated his opposition to allowing companies to issue perpetual dual-class shares.

Next up on Coffee’s panel was U.S. District Judge Jed Rakoff, whom, Coffee explained, doesn’t specialize in corporate governance, but “he specializes in wisdom.” Rakoff addressed the issues surrounding the May 2, 2019, decision in United States v. Connolly, which dealt with the risks of outsourcing the government’s criminal or regulatory investigations to private law firms.

In reviewing the history behind the case,  the judge explained how the corporate sentencing guidelines’ incentives for companies to cooperate, the rise of deferred prosecution and non-prosecution agreements, and prosecutors’ desire to save resources resulted in more investigations being done by companies’ private law firms, which then handed the findings to the government. Problems arose, however, when, as in the Connolly case, the government became too involved in shaping the questions asked of witnesses, who were under threat of being fired if they did not testify. Company lawyers were accused of effectively acting as an arm of the government and coercing testimony in violation of the Fifth Amendment. In Connolly, Rakoff said the problem was not serious enough to overturn the decision, but warned that the case “suggests strongly” that too much government involvement “will taint the process.”

Coffee next called on Joshua Mitts to talk about his research  on what he calls “short and distort,” the phenomenon of short sellers crossing the line from offering useful criticism about a company and its stock to manipulating the market in violation of the law. Mitts discussed what, short of an outright lie, might qualify as “the something more” that would push such investors over the line but explained that regulators were hesitant to act against the practice for fear of discouraging short selling.

Finally, Joel Seligman, the former president of the University of Rochester and a renowned expert on the securities laws, spoke about the complexities of shareholder voting and the proxy process, the conflicts of interest in the business of proxy advisers, and the fight to force the board of Johnson & Johnson to allow a shareholder vote on a proposal requiring arbitration for disputes between the company and its stockholders.

The event was sponsored by the law firms of Gibson, Dunn & Crutcher and Wachtell, Lipton, Rosen & Katz. The co-chairs of the conference were Coffee, Eduardo Gallardo of Gibson Dunn, former Delaware Supreme Court Justice Jack B. Jacobs, and William Savitt of Wachtell Lipton.

Other participants included Professor Eric Talley of Columbia Law School; Albert Garner of Lazard Freres; Kelly Sullivan of Joele Frank, Wilkinson Brimmer Katcher; Susan Wood Waesco of Morris, Nichols, Arsht & Tunnel; Jessica Zeldin of Rosenthal, Monhait and Goddess; Ted Yu of the SEC; Ryan McLeod of Wachtell Lipton; Joames Moloney of Gibson Dunn; Karessa Cain of Wachtell Lipton; David Dubner of Goldman Sachs; Margaret Foran of Prudential Financial; Cristiano Guerra of Institutional Shareholder Services; and Elizabeth Ising of Gibson Dunn.