The DuPont Proxy Battle: New Myths, Old Realities—and Even Newer Data About Hedge Fund Activism

A watershed moment is coming for shareholder activism and corporate governance generally, as the proxy contest brought by Trian Management Fund, seeking effectively to break up DuPont, enters its final stages (with the vote being less than a month away). Technically, the contest is to elect four Trian Fund nominees to the DuPont board, but, as a column in the New York Time’s Dealbook put it more bluntly, the real fight is over whether to break DuPont into three parts and “shut down DuPont’s central research labs.”[1] Much about this contest is unusual: unlike other targets of activism, DuPont … Read more

Delaware Throws a Curveball

Since the Corporation Law Council of the Delaware State Bar Association announced earlier this month that it was recommending statutory amendments to prohibit “loser pays” fee shifting bylaws and charter provisions (and thus overrule the Delaware Supreme Court’s 2014 decision in ATP Tour v. Deutscher Tennis Bund[1]), a predictable reaction has followed. Plaintiff’s attorneys and most academics applauded the decision, fearing that the alternative would be the death knell of private enforcement. In contrast, conservatives have attacked the proposed legislation, seeing it as the end of Delaware’s position as the champion of “enabling” corporate legislation and predicting that … Read more

IGNORANCE IS NOW BLISS: But What Can the Government Do?

United States. v. Newman[1] represents the most serious defeat for the DOJ and the SEC in their campaign against insider trading since Dirks v. SEC[2] in 1983. In both cases, mistakes were made, and the Government did not at the time appreciate the difficulty of its position. Indeed, in Dirks, the SEC sued the hero of the Equity Funding scandal (Ray Dirks), not the villain. In Newman, the U.S. Attorney was prosecuting far more remote tippees than those in any other Second Circuit case. If the Government were to seek certiorari and take this case to … Read more

Federal Preemption and Fee-Shifting

All eyes are on Delaware, where soon the Delaware Bar Association will recommend to the state legislature whether or not to curb the Delaware Supreme Court’s decision last year to uphold the facial validity of a board-approved bylaw that shifted the attorneys’ fees of defendants to the unsuccessful (or less than completely successful) plaintiff. Much commentary has already focused on the merits of that decision, ATP Tours, Inc. v. Deutscher Tennis Bund,[1] and this column will not go there. That furrow has already been well plowed.[2]

Although this columnist agrees with the majority who believe the ATP Read more

“Loser Pays”: Who Will Be The Biggest Loser?

About two months ago, this columnist was asked to prepare a short report to the SEC’s Investor Advisory Committee on the then still largely unnoticed trend toward bylaw and charter provisions that imposed some form of a “loser pays” rule on plaintiffs in intracorporate litigation. After a quick and dirty investigation, I reported three interesting facts:

First, between May 29, 2014 and September 29, 2014, some 24 companies had adopted such a provision (always applicable only to plaintiffs and always without the matter being put to a shareholder vote). This was obviously a rapid response to the Delaware Supreme Court’s … Read more

Fee-Shifting and the SEC: Does It Still Believe in Private Enforcement?

Corporate law normally moves at a glacial pace, but sometimes there are periods of rapid change, much of it invisible to the ordinary observer.  2014 may be witnessing such a period of rapid, low-visibility change.  Between May 29 and September 29, 2014, some 24 public companies adopted either bylaws or charter provisions mandating that an “unsuccessful” plaintiff in shareholder litigation (whether in state or federal court or arbitration) must pay the fees and expenses of all defendants.  This list includes high profile examples, such as the recent Alibaba IPO.[1]  Generally, “reporting” companies accomplish this result through a board-adopted bylaw, while … Read more

Hedge Fund Activism: Impacts and Options

Hedge fund activism has increased almost hyperbolically.  Some view this optimistically as a means for bridging the separation of ownership and control; others are more pessimistic, seeing mainly wealth transfers from bondholders or speculative expectations of a takeover as fueling the spike.  Equivalent division exists over the impact of this increased activism, with optimists seeing real gains that do not erode over time and improvements in operating performance, and pessimists predicting shortened investment horizons, increased leverage, and reduced investment in research and development.

In a paper recently posted on SSRN,[1] we take an analytic perspective.  We begin by surveying the … Read more

Allergan and the Odd Couple

Not since Felix and Oscar teamed up in the Odd Couple has there been a more curious collaboration.[1]  Pershing Square Capital Management L.P. and Valeant Pharmaceuticals International, Inc. have entered into a short-term marriage of convenience to facilitate Valeant’s hostile acquisition of Allergan, Inc. in a $53 billion deal.  As with many relationships, onlookers have questions: “What does she see in him?” here yields to “Why does Valeant need Pershing Square?”  Beyond this initial question about whether this relationship makes sense, there is also a second and more traditional legal issue: Can a strategic bidder really tip a hedge fund … Read more

High Frequency Trading Reform: The Short Term and the Longer Term

High frequency trading has more enemies than friends, but the key question is what are the costs of reform.  Attorney General Schneiderman’s pending suit against Barclays PLC for allegedly misrepresenting that its dark pool (known as “LX”) was “safe” from high frequency traders, when in fact it appears to have been a hotbed of “predatory” trading, shows two things:  First, it underlines that the market, itself, does not really understand the microstructure of equity trading, because trading at LX fell by 37% the week after the suit revealed unsuspected practices.[1]  But LX may not stand alone, and other dark pools … Read more

Death by One Thousand Cuts

Ask any plaintiff’s lawyer about Halliburton II, and you will hear a predictable response: “Whew! We Dodged the Bullet!”  But that is not entirely accurate.  The bullet hit, but inflicted a non-fatal wound.  Prior to Halliburton II, class certification was automatic in securities class actions, at least if the stock traded on the NYSE or the upper reaches of Nasdaq.  After Halliburton II, defendants will now have a chance to show a lack of “price distortion” (with the burden on them, to be sure).  That may be a fair and balanced result (as I wrote here earlier … Read more

Hedge Fund Activism: New Myths and Old Realities

Two recent developments have changed the playing field of corporate governance: (1) the Delaware Chancery Court’s ruling this month on the use of a two-tier poison pill in the Sotheby’s case (and Sotheby’s quick and conciliatory settlement two days later, which conceded three  seats on Sotheby’s expanded board to Third Point LLC, a particularly aggressive hedge fund),[1] and (2) the joint $50 billion bid of Pershing Square Capital Management and Valeant Pharmaceuticals International Inc. for Allergan Inc.[2]  In their wake, every pundit has announced that this is the heyday of hedge fund activism.  Fund managers now hold the whip hand, … Read more

The JOBS Act II Is Coming!

In 2012, the Republicans learned an important lesson: neither the White House nor many Congressional Democrats would resist major deregulation of the federal securities laws if that deregulation was packaged as a “JOBS Act.” 2014 is also an election year, and a similar election year package may be in progress. On Wednesday, April 9th, the Subcommittee on Capital Markets and Government Sponsored Entities of the House Committee on Financial Services held hearings on seven bills. They range from the modest to the extreme, and all are united only by their insistence on dismantling securities regulation. Some have unanticipated consequences that … Read more

The Herbalife Circus

You can’t make this stuff up.  Reality is more bizarre than fiction.  Good as “House of Cards” or “Game of Thrones” are, they cannot match the Herbalife battle for the sheer confrontation of economic power, the treachery among rivals, or the political machinations.  What the War of the Roses was to Shakespeare, the Herbalife battle could be for future playwrights, supplying them with similar opportunities to exploit well-known historical events for artistic purposes.  Can one imagine a future David Mamet writing:  “To short or not to short.  That is the question.”?[1]

This soap opera began in December, 2012 when shareholder … Read more

After The Fraud on the Market Doctrine: What Should Replace It?

Like children on Christmas Eve, securities defense attorneys and corporate executives are waiting in hopeful anticipation for the Supreme Court’s coming decision in Halliburton Co. v. Erica P. John Fund, Inc. (“Halliburton II”), which may overrule the “fraud on the market” doctrine (“FOTM”) that was announced over a quarter century ago in Basic v. Levinson.[1] Academics are divided, with probably the majority fearing the loss of general deterrence if the securities class action is substantially undercut. Conversely, a minority (including this author) believe it is remarkable that FOTM has survived as long as it has because it is extraordinarily ill-suited to the real world of securities fraud (as hereafter explained). A third more nervous group of spectators are the managing partners of litigation-oriented law firms, who know that FOTM’s potential abolition would likely imply a steep decline in securities litigation, which is the staple of their practice. Ironically, some of the securities defense attorneys eagerly awaiting FOTM’s demise may next year be learning how to litigate patent cases. Be careful then what you wish for, as you may get it. Read more

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Editor's Tweet: Professor John Coffee on Columbia Law: After The Fraud on the Market Doctrine: What Should Replace It?

SEC Enforcement: Talking the Talk, But Walking the Walk?

Almost everyone has an opinion about securities enforcement.  Many are disappointed (and even angry) that “few high level executives” have been prosecuted (criminally or even civilly) in connection with the 2008 financial crisis.[1]  Deep in their bunker, the SEC still has some diehards who maintain that fraud has been fully prosecuted, but, even there, attitudes are changing.  The shift is much clearer at the Department of Justice (“DOJ”), which has just settled with JPMorgan for $13 billion and may be in hot pursuit of still unnamed defendants.[2]  Even if the SEC is presenting itself as a more aggressive … Read more

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Editor's Tweet: John C. Coffee Jr. of Columbia Law School on SEC Enforcement: Talking the Talk, But Walking the Walk?

In the Wake of the Whale, What’s Changed?

The “London Whale” is far from the financial crime of the century, but it may well be the financial blunder of the decade. Crimes and blunders are, of course, different, but the slow and inconsistent response by JPMorgan Chase & Co. to its discovery that traders in its London office were hiding their losses has placed the behavior of several JPMorgan officers on the ambiguous seam between a negligent blunder and more culpable fraud.

This frames an obvious question: Does the U.S. Securities and Exchange Commission’s settlement with JPMorgan deal adequately with this misbehavior? After ignoring Lehman Brothers and other … Read more

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“Bad Actors” and Worse Policy

Is the SEC capable of blushing?  Increasingly, there are occasions in which the Securities and Exchange Commission takes positions so inconsistent with the protection of investors and its own history and so deferential to the industry that one has to ask:  What were they thinking?  How can a federal agency be that tone deaf?  This column will, first, examine the SEC’s new policy toward when “bad actors” can use the vastly expanded Rule 506 and, second, focus on how these rules will likely be gamed.

In Release No. 33-9414 (July 10, 2013),[1] the Commission has adopted rules to disqualify … Read more

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Disclosure Is Still the Best Policeman!

In a delightful essay, Ron Gilson and Jeff Gordon remind us that the times have changed and the Williams Act belongs in their view to the era of the Beatles. (Personally, I have trouble believing that Sgt. Pepper was really that long ago.  Next, they will try to tell me that John Lennon is dead).  Even if they are right, I must respond with a counter-truism.  Plus ca change, plus la meme chose.  And I will raise their bid, by invoking two other familiar maxims:  First, power corrupts, and absolute power is at least within view for institutional … Read more

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Editor's Tweet: John Coffee on why Disclosure Is Still the Best Policeman in the 13(d) Debate

The Institute for the Fiduciary Standard Awards Its First “Oscar”

The Institute for the Fiduciary Standard, a non-profit organization dedicated to the advancement of fiduciary principles, has awarded its first ever Tamar Frankel Fiduciary Prize to Robert A.G. Monks, the corporate governance activist and scholar. The Frankel Fiduciary Prize is intended to recognize contributions to “the preservation and advancement of fiduciary principles in public life” and is named after Professor Tamar Frankel of the Boston University Law School, a leading scholar in this field.

Professor John C. Coffee, Jr. of Columbia University Law School, the Chairman of the Nominating Committee that made this selection, explained the Committee’s decision, saying:

“Bob … Read more

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‘Neither Admit Nor Deny’: Practical Implications of SEC’s New Policy

In a move that appears at once to be shrewd, savvy and largely symbolic, the SEC has modified its longstanding policy that it will not require a defendant to admit or deny liability, or facts that might establish its liability, in a settlement with the SEC. Now, such an admission may be required “when appropriate.”1 Whatever the outcome in the SEC’s mandamus appeal of Judge Jed S. Rakoff’s Citigroup decision,2 Rakoff has effectively won the war, even if he loses the Citigroup battle. Although denying that Rakoff influenced them, the SEC conceded (effectively, if not formally) that its policy was

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Editor's Tweet: Prof. John C. Coffee, Jr. of Columbia Law School discusses 'Neither Admit Nor Deny': Practical Implications of SEC's New Policy