Do Activist Investors Constrain Managerial Moral Hazard in Chapter 11?

Chapter 11 creates a system of collective corporate governance that allows stakeholders that are usually passive – such as shareholders or creditors like lenders and bondholders – to play a day-to-day role in overseeing management and monitoring the business.  In recent years, activist investors have begun using this system to improve their return on investment.  They buy the claims of distressed firms, hire lawyers and investment bankers and negotiate to restructure the firm’s business and capital structure.  In some cases, these negotiations conclude with an out-of-court solution, but many firms require a trip through bankruptcy court to solve their financial … Read more

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Ice Cube Bonds: Allocating the Price of Process in Chapter 11 Bankruptcy

Bankruptcy cases are as different as the types of businesses that fail, but all share an element of crisis.  The weeks and days that precede a bankruptcy filing are often chaotic.  The first days after filing may be even worse, regardless of the size of the case. Any potential rescuer, be it a lender, a supplier, or a buyer, has tremendous leverage.  The potential salvor has the power to, and often does, exact concessions in many forms: preferential treatment of prepetition debt, retroactive perfection of liens, onerous loan terms, control of the debtor after bankruptcy, or ownership of any upside … Read more

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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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How Pressure on the Issuers of Private-Label Mortgage-Backed Securities Can Improve the Accuracy of Credit Ratings

The following post comes to us from Brent J. Horton, assistant professor at Fordham University Gabelli School of Business.

In my recent Article, Toward a More Perfect Substitute: How Pressure on the Issuers of Private-Label Mortgage-Backed Securities Can Improve the Accuracy of Ratings,[1] which is scheduled to be published in Volume 93 of the Boston University Law Review this winter,[2] I propose a burden shifting procedure that will force issuers of private-label MBS to take ownership of the ratings incorporated into their registration statement (e.g., Aaa, Baa3)—specifically, the accuracy of those ratings. The issuers will … Read more

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Editor's Tweet: Fordham's Horton on How Pressure on the Issuers of Private-Label Mortgage-Backed Securities Can Improve the Accuracy of Ratings

Sullivan & Cromwell discusses Bank Capital Plans and Stress Tests

Federal Reserve Issues Interim Final Rules Addressing Application of New Basel III-Based Capital Framework for Purposes of the 2013-2014 Capital Plan and Stress Test Cycle

The Federal Reserve recently issued two interim final rules that clarify how covered companies must incorporate the new U.S. Basel III-based final capital rules (the “Basel III Capital Rules”) into their capital plan submissions and Dodd-Frank Act stress tests for the upcoming 2013-2014 cycle.

To address and clarify the potential issues created by the interaction of the overlap of the nine-quarter planning horizon of the Federal Reserve’s current version of the capital plan

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The Government Shutdown Could Affect Your Transaction

The US antitrust authorities will cease certain of their operations during the pending government shutdown and your transaction may be affected.

The US antitrust agencies receive an average of 25 Hart-Scott-Rodino (HSR) filings per week. During the current government shutdown, the Federal Trade Commission (“FTC”) and Antitrust Division of the Department of Justice (“Antitrust Division”) have indicated they will continue to accept HSR filings, and the FTC’s Premerger Notification Office will be open but with a very limited staff. We see three consequences that transacting parties should take into consideration:

First, given the limited staff likely to be on hand … Read more

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Editor's Tweet: Clifford Chance's Tim Cornell on The Government Shutdown Could Affect Your Transaction

Social Enterprise: What is it Good For?

The following comes to us from Brian Galle, an associate professor at Boston College Law School.

Social enterprise lawmaking is a growth industry.  Over the past four years, state statutes authorizing new forms of corporate entities have proliferated.  The new entities come in several flavors — low-profit limited liability companies, “benefit corporations,” and others — all with the common element that they purport to authorize the firm’s managers to mix profit with some other socially valuable function.

These developments are puzzling.  As I argue in a new essay, organizational theory suggests that when it comes to traditional forms of … Read more

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Editor's Tweet: BC Law's Brian Galle on Social Enterprise: What is it Good For?

Facebook, the JOBS Act, and Abolishing IPOs

The following comes to us from Adam C. Pritchard, the Frances and George Skestos Professor of Law at the University of Michigan Law School.  

A two-tier market system would go a long way toward promoting capital formation and curtailing speculation.

Initial public offerings (IPOs)—the first sale of private firms’ stock to the public—are a bellwether of investor sentiment. Investors must be bullish if they are putting their money into untested start-ups. IPOs are frequently cited in the business press as a key barometer of the health of financial markets.

Politicians, too, see a steady flow of IPOs as an indicator … Read more

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Commoditizing Creditor Control

The following comes to us from Yesha Yadav, Assistant Professor of Law at Vanderbilt Law School:

Scholars have long lamented that the growth of modern finance has given way to a decline in corporate governance. According to current theory, the expansive use of credit derivatives has made these lenders uninterested, even reckless, when it comes to exercising creditor discipline.  Credit derivatives, such as credit default swaps (CDS), allow lenders to trade away the credit risk of the loans they extend. Without economic skin-in-the-game, lenders are left with little motivation to invest in ensuring that debtors remain creditworthy.  Indeed, their interests … Read more

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Clearinghouse Overconfidence

The following comes to us from Mark J. Roe, the David Berg Professor of Law at Harvard Law School:

Regulatory reaction to the 2008-2009 financial crisis focused on complex financial instruments that deepened the crisis. A consensus emerged that these risky financial instruments should move through safe, strong clearinghouses, which would be bulwarks against systemic risk, and that the destructive impact of the failures during the crisis of AIG, Lehman Brothers, and the Reserve Primary Fund could have been softened or eliminated were strong clearinghouses in place. A clearinghouse is an entity that takes over the trades that parties make, … Read more

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Reed Smith discusses CFTC’s Final ‘Harmonization’ Rules

The Commodity Futures Trading Commission (CFTC) caused quite a stir in 2012 when it changed its rules to require investment advisers to mutual funds that invest to any significant degree in derivatives, to register as “Commodity Pool Operators” (CPOs). The CFTC’s actions drew the ire of the mutual fund industry to such an extent that industry groups challenged the rules in court.

Notwithstanding widespread industry opposition, the CFTC stuck to its guns, perceiving a need to regulate mutual funds employing increasingly complex derivatives strategies. At the same time, the CFTC recognized that the application of its rules could create overlapping … Read more

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Professor John C. Coffee, Jr. to Address U.N. General Assembly on the Role of Credit Rating Agencies at 4pm Today

The following comes to us from Public Affairs at Columbia Law School:

John C. Coffee Jr., the Adolf A. Berle Professor of Law at Columbia Law School, has been asked by Vuk Jeremić, president of the 67th Session of the United Nations General Assembly, to serve on a panel on the role of credit rating agencies in the global economy.

The Sept. 10 high-level debate will provide an opportunity for experts from government, international NGOs, and business to discuss the challenges associated with the current methods of credit rating agencies. Coffee, a leading expert on securities law and … Read more

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Cyborg Finance: The Emerging Future of Finance

In August of 2013, the global markets experienced the perils of an ongoing sea change in finance:  Goldman Sachs encountered a serious options trading malfunction due to a programming error; Everbright Securities, a leading Chinese securities broker, suffered a nearly $4 billion trading error due to a software glitch; and the NASDAQ stock exchange suspended trading for three hours on a regular trading day due to technical difficulties.

In a recently published article, The New Investor, I examine the ongoing sea change in finance. Machines appear to be on the rise and humans on the decline. Human endeavors have … Read more

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Editor's Tweet: Prof. Tom C.W. Lin of Temple Law School discusses "The New Investor" in the capital markets

Credit Risk Retention: Agencies Propose Revised Rule

The following is a joint press release from six federal agencies on the revised credit risk retention rule, available here.

Six federal agencies on Wednesday issued a notice revising a proposed rule requiring sponsors of securitization transactions to retain risk in those transactions. The new proposal revises a proposed rule the agencies issued in 2011 to implement the risk retention requirement in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

This proposal is being issued jointly by the Board of Governors of the Federal Reserve System, the Department of Housing and Urban Development, the Federal Deposit … Read more

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The Geography of Revlon-Land in Cash and Mixed Consideration Transactions: A Response to Professor Bainbridge

The following comes to us from Mohsen Manesh, an Assistant Professor at the University of Oregon School of Law.

In the recently published The Geography of Revlon-Land,[1] Professor Stephen Bainbridge attempts to crisply delineate the boundaries and contours of the evolving doctrine first articulated by the Delaware Supreme Court in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.[2]— or Revlon-land, more colloquially. The Revlon doctrine famously dictates that in certain transactions involving the “sale or change in control” of a corporation, the corporation’s board of directors has a duty to “get[] the … Read more

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Editor's Tweet: Prof. Manesh of Oregon Law Respond to Bainbridge on Revlon-Land

Swaps Pushout Rule: Federal Reserve Banks Revise Discount Window Documentation

Effective July 16, 2013, the Federal Reserve Banks’ Operating Circular No. 10 (“OC-10”) has been amended to include a new appendix entitledProhibition Against Federal Assistance to Any Swaps Entity (“Appendix 6”).  Appendix 6 is intended to ensure that the Federal Reserve Banks comply with the requirements of Section 716 of the Dodd-Frank Act (“Swaps Pushout Rule”) when making discount window advances under OC-10.  OC-10 sets forth the terms and conditions under which an entity may obtain advances from, incur obligations to, or pledge collateral to a Federal Reserve Bank.

The Swaps Pushout Rule … Read more

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Cleary Gottlieb Discusses Supreme Court Decision in Italian Colors Restaurant to Uphold Class Arbitration Waivers

On June 20, 2013, the Supreme Court issued American Express v. Italian Colors Restaurant, a 5-3 opinion delivered by Justice Scalia reaffirming that federal courts must enforce arbitration agreements strictly according to their terms, including agreements containing class arbitration waivers. The Court emphasized that such waivers are enforceable even where the cost of pursuing an individual claim would be prohibitively expensive.1

 The Supreme Court’s Decision

Merchants who accepted American Express card products filed class action suits against American Express in the District Court for the Southern District of New York alleging violations of federal antitrust law. The merchants claimed … Read more

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Federal District Court Expresses Skepticism That Dodd-Frank Extraterritorial Jurisdiction Provision Overturns Morrison in Government Enforcement Actions

Federal District Court Expresses Skepticism That Dodd-Frank Extraterritorial
Jurisdiction Provision Overturns Morrison in Government Enforcement Actions

In a memo we wrote on the day the Dodd-Frank Act was signed into law, we discussed a provision in that law seemingly intended to render the Supreme Court’s decision in Morrison v. National Australia Bank inapplicable to cases brought by the SEC or the Justice Department. We noted that this “extraterritorial jurisdiction” provision, Section 929P(b), contains a significant drafting error, one that likely makes it a practical nullity. Since then, much academic commentary has concurred in our view. Last week, a federal … Read more

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Editor's Tweet: Wachtell's George Conway on District Court Skepticism That Dodd-Frank Extraterritorial Jurisdiction Provision Overturns Morrison

The Marketplace of Ideas: Concluding Remarks on the Legal Theory of Finance (LTF)

The CLS Blue Sky Blog presents the final part of the second installment of our new series, entitled “The Marketplace of Ideas.”  Parts I, II,  III, and IV can be found hereherehere, and here.  Earlier installments are available here.  The intent is to present different perspectives on the same subject by two or more authors.

The subject is Professor Katharina Pistor’s Legal Theory of Finance (LTF).  For a short description of her theory and the format of the commentary we are releasing, please see here.  In the final release,  LTF – The Read more

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Editor's Tweet: The Marketplace of Ideas: Concluding Remarks on the Legal Theory of Finance (LTF)

LTF – The Work Ahead

Discussing the Legal Theory of Finance (LTF) on the Marketplace of Ideas has been a great experience. I want to thank my colleague Kathryn Judge for coming up with the idea and for writing an inspiring blog post that raises important questions about the content and boundaries of the theory’s core features. The response to the call for blog posts from practitioners and academics was equally uplifting – and I am extremely grateful to the contributors for their engagement with LTF and the critiques they offered. Thanks also to Jason Parsont who manages the CLS Blue Sky Blog and kept … Read more

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Editor's Tweet: Katharina Pistor delivers closing remarks on the Marketplace of Idea Installment on LTF