Marandola and Mossucca

When Did the Stock Market Start to React Less to Downgrades by Moody’s, S&P and Fitch?

Moody’s, S&P and Fitch represent an oligopoly in the credit rating business, accounting for 94 percent of the global market (Candelon et al., 2014) and for about 96.5 percent of all the outstanding ratings in U.S.[1] The three agencies are key players in financial markets as they assess the credit worthiness of almost any debt issuer including governments, firms, municipalities and financial institutions. Moody’s, S&P and Fitch heavily affect corporate financing through ratings assigned to corporate debt. The economic literature has shown that bond ratings are strongly correlated with private bond yields (Hand et al., 1992; Hite and Warga, … Read more

O’Melveny discusses Delaware Supreme Court Confirming Business Judgment Standard For Fully Informed, Uncoerced Stockholder Vote

On May 6, 2016, in Singh v. Attenborough, No. 645, the Delaware Supreme Court strengthened the defenses available to directors by clarifying a roadmap for effectively dismissing post-closing claims for breach of fiduciary duty.  A fully informed, uncoerced vote of the majority of disinterested stockholders, and a well-run sale process with any deficiencies either avoided or disclosed in advance of the stockholder approval are key to invoking director-favorable protections against post-closing liability for breach of fiduciary duty in merger transactions.

The Supreme Court issued the Order upon reviewing Chancery Court’s dismissal of stockholder-plaintiffs’ claims for breach of fiduciary duty … Read more

Gibson Dunn discusses Reverse Morris Trusts Revisited

Over the last twelve months, over fifty US publicly traded companies with a market capitalization of over $1 billion have announced plans to spin-off lines of business into independent companies.  During that period, companies such as Starwood Hotels, ConAgra Foods, and Citrix Systems have announced spin-offs of one or more businesses.

Spin-offs are motivated by various reasons, but the common theme in these transactions is that the spun-off entity and the remaining corporation should perform better and achieve better market valuation on a stand-alone basis.

A spin-off is effected by reorganizing a line of business, contributing its assets and liabilities … Read more

Packin & Edwards (2)

Should Corporate Whistleblowers Go to Arbitration?

Following the 2008 financial crisis, more and more countries have begun to embrace whistleblower protections as a tool to change corporate cultures.  Such provisions may give whistleblowers the protections they need to raise their voices, and draw attention to undesired and sometimes even illegal activities, in situations when they would otherwise remain silent.  After all, many people will hesitate to point out questionable conduct if they know they might face retaliation.

In the United States, Congress authorized the SEC to go further than other whistleblower provisions by authorizing a bounty program—allowing the SEC to reward whistleblowers for particularly valuable tips. … Read more

Vince Buccola, headshot

Federalism and Federal Corporate Rights

Controversy surrounding the role of corporations in public life has not abated in the six years since the Justices decided, in Citizens United v. FEC,[1] that corporations have political-speech rights secured by the First Amendment. If anything, the Court’s judgment in Burwell v. Hobby Lobby, Inc.,[2] although far less significant in practical terms, magnified discontent in some quarters. Doomed calls for constitutional amendment are still a frequent refrain. At least one presidential candidate has reportedly proposed a litmus test to Supreme Court nominations based on a commitment to overturning Citizens United.[3] And so on. … Read more

Cleary Gottlieb discusses CFPB Rulemaking on Arbitration Agreements in Financial Products and Services Contracts

On May 5, 2016, the Consumer Financial Protection Bureau (“CFPB”) proposed a rule that would  govern two aspects of consumer finance dispute resolution.  First, the new regulations would prohibit providers of certain consumer financial products and services from including in their contracts arbitration clauses that prohibit class action lawsuits.  Second, covered providers involved in an arbitration pursuant to a pre-dispute arbitration agreement would be required to submit specified arbitral records to the CFPB.  If the proposed rule becomes final, it will significantly impact the current industry practice of including arbitration clauses with class action waivers in these types of contracts, … Read more

Gogineni and Puthenpurackal

The Impact of Go-Shop Provisions in Merger Agreements

Target firms typically employ either an auction or a negotiation method during merger negotiations. In auction deals, the pre-public takeover process involves contacting several potential bidders, signing confidentiality/standstill agreements and accepting private bids. In negotiation deals however, the target engages with only one bidder in the pre-public takeover process. Using either selling method, the target board negotiates with the bidder(s) and if an acceptable price is obtained from a bidder, a definitive merger agreement is signed and a public announcement is made. Typically, after the public announcement of a merger agreement, target boards do not actively solicit new bids although … Read more

Covenant Violations, Collateral and Access to Funding: Private Firms and Public Firms

Covenants are an important feature of loan contracts that enable ongoing monitoring of borrowers by banks and flexible renegotiation of contract terms in the face of changing external and borrower conditions.  A large body of empirical research has examined the consequences of loan covenant violations for public firms.  However, little is known about how banks react to covenant violations by private companies, despite the large share of these firms in the economy. Any reduction in access to loans is likely to have a more direct impact on investment and employment for private firms since they are primarily reliant on banks … Read more

Daniel Sang

Salman v. United States and Insider Tipping: What Could be Decided?

In Salman v. United States,[1] the Supreme Court will revisit Dirks v. SEC[2] and likely resolve the uncertainty as to personal benefit and insider gifts of confidential information that followed the Second Circuit’s decision in United States v. Newman.[3]  The case involves a young investment banker’s gifts of information about unannounced client transactions to his brother, who, in turn, shared the tips with their relative by marriage, the defendant Bassam Salman.

Salman will also be the first time that the Court decides the liability of a downstream insider trading tippee.  A decision will therefore likely … Read more

Davis Polk discusses Appellate Reversal of $1.3 Billion Penalty Against Countrywide, Based on Appellate Finding of Lack of Intent

On May 23, 2016, the United States Court of Appeals for the Second Circuit reversed a $1.3 billion civil penalty imposed against Countrywide Home Loans, Inc., Bank of America, N.A., and related defendants (collectively, “Countrywide”) under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”).[1]  Although the decision rebuffed the government’s case against Countrywide, it did not address the government’s novel interpretation that FIRREA permits civil penalties against financial institutions whose criminal conduct is “self-affecting.”  FIRREA permits civil penalties against a defendant if it commits certain unlawful acts “affecting a federally insured financial institution.”[2]  Over a … Read more

Margaret Thornton

Contemporary Legal Education and the Transformation of Private Legal Practice

There has been tension between the legal academy and the practising profession ever since law was first taught in university law schools in the 19th century. The sense of unease arose because of uncertainty as to whether the primary role of a law school was to train lawyers for practice or to ensure that law was accepted as an independent scholarly discipline appropriate for a university, like history or philosophy. Universities feared that law schools might turn out to be mere trade schools while practitioners feared that an exclusive focus on liberal education would fail to produce skilled practitioners.… Read more

Brandon Garret

Bad Hustle

“And we played the Hustle music.  There were, you know, printed materials passed out,” with dance steps so “ideally we could all perform the Hustle in precision,” recalled the former Countrywide first vice president. “There was a lot of excitement.  There was a lot of fanfare. It was fun.”  He was describing events in the summer of 2007, when Countrywide decide to speed up its process for approving loans, using a program called the “High Speed Swim Lane,” or “HSSL” (or “Hustle”).  The music stopped after the global financial crisis.  Bank of America bought out the failing Countrywide Financial.  In … Read more

Proskauer explains Supreme Court’s Clarification of Jurisdiction Under Securities Exchange Act

The U.S. Supreme Court ruled on May 16, 2016 that the provision of the Securities Exchange Act of 1934 granting federal district courts exclusive jurisdiction over suits brought to enforce the Exchange Act is subject to the same jurisdictional test established by the general federal-question jurisdictional statute. The Court held in Merrill Lynch v. Manning that, under both statutes, the question is whether the case “arises under a federal law.” The Court thus rejected the defendants’ effort to remove a case from state court by asserting a broader theory of federal jurisdiction under the Exchange Act.

Factual Background

The ManningRead more

Cleary Gottlieb explains SEC’s New Guidance on Non-GAAP Financial Measures

On May 17, 2016, the Division of Corporation Finance of the Securities and Exchange Commission (the “SEC”) released new and updated Compliance and Disclosure Interpretations (“C&DIs”) on the use of non-GAAP financial measures (“NGFMs”).  The release of the C&DIs follows a series of recent speeches by SEC Chair Mary Jo White, Chief Accountant James Schnurr and other staff that expressed concerns over prevalent and liberal use of NGFMs.  The C&DIs signal a tightening of the SEC’s policy toward NGFMs and renewed SEC focus on their use.

One new C&DI deserves special attention.

Among the new and updated C&DIs, Question 100.04 … Read more

Long Live the Editor

After the July 4th weekend, Reynolds Holding will be taking over as the fourth editor-at-large of the CLS Blue Sky Blog.  It has been a remarkable year and a half, and I am confident our Blog will continue to grow in the coming years.  I am grateful to the faculty committee (Professors Jack Coffee, Ed Greene, Robert Jackson and Kate Judge), the student editors (Jennifer Barrows, AJ Farkas and John Knight) as well as Columbia Law School for providing opportunity and support.  I intend to continue writing as time allows and invite you to visit my webpage.  I believe … Read more

Cicero & Mi

Do Executives Behave Better When Dishonesty is More Salient?

In recent decades, it seems the only reason one flavor of corporate or financial misbehavior falls out of the public discourse is because a newer one has taken its place. Following the widespread corporate frauds of the 1990s, the unscrupulous acts of bankers that contributed to the financial crisis, and the Ponzi scheme orchestrated by Bernie Madoff, to name a few, the thoughtful observer must be left anticipating the next scandalous headline. Given the steady flow of reprehensible actions by business professionals, a considerable amount of attention has been focused on understanding, and perhaps mitigating, egregious behaviors in the business … Read more

Eitan Goldman and Wenyu Wang

Weak Governance by Informed Large Shareholders

Concerns about the governance of public corporations have taken center stage in recent years. Part of the debate on how to improve corporate governance has focused on policies that will give large shareholders (typically institutional investors) greater influence over corporate decisions. Indeed some theoretical and empirical papers support the governance role of large shareholders.

The underlying view is that large shareholders have both the ability and incentive to maximize the value of all shareholders. Large shareholders may improve governance either through active monitoring or through passive selling and both activities are expected to improve governance.

In this paper, we propose … Read more

PwC discusses Protecting Elderly Customers: CFPB and FINRA Step In

The Consumer Financial Protection Bureau (CFPB) released recommendations in March for how banks and credit unions can better protect elderly customers from financial exploitation. The CFPB issued its recommendations as the elderly population continues to rapidly grow, positioning banks and credit unions for a significant increase in elder financial exploitation (EFE) attacks.[1]

Other regulatory bodies have taken notice of this growing threat as well and are putting forth regulations and guidance of their own. For example, the Financial Industry Regulatory Authority (FINRA) last year proposed a regulation requiring broker-dealers to take action in response to suspected EFE.

EFE is … Read more

Latham & Watkins discusses World-First Regulatory Sandbox Opening for Play in the UK

Innovative businesses in the financial services industry looking to test exciting new financial products and services able to apply to the UK’s regulatory sandbox.

The “regulatory sandbox” is the next step for the Financial Conduct Authority (FCA) as part of Project Innovate, a programme that commenced in October 2014 aiming to remove unnecessary barriers to innovation for businesses involved in banking and finance in the United Kingdom. The sandbox marks a significant leap forward in financial services regulation and is the first of its kind, globally. With the launch of Project Innovate, and now the sandbox, the FCA has positioned … Read more