Gwynne L. Skinner

Rethinking Limited Liability of Parent Corporations for their Subsidiaries’ Extraterritorial Violations of Human Rights Law

In order to ensure that victims of business-related human rights and gross environmental abuses in countries that host transnational business (host countries) are able to have the ability to seek and obtaining a remedy for their harm, courts should ignore the separate legal personality of parent corporations operating in countries with weak or corrupt judicial systems where the victims cannot otherwise obtain a remedy against the subsidiary, allowing corporate parents to be held liable for such harm. In such situations, the corporate parents are the entities that can best, and normatively should, remedy the victims’ harm, even if they do … Read more

Miriam Schwartz-Ziv

Gender and Board Activeness: The Role of a Critical Mass

Are gender-balanced boards more active than non-gender balanced boards? I address this question in “Gender and Board Activeness: The Role of a Critical Mass”, forthcoming in the Journal of Financial and Quantitative Analysis. Using detailed minutes of board meetings that I coded and then analyzed in an econometric model, I find that gender-balanced boards (defined as boards that include at least three directors of each gender in attendance) are approximately twice as active compared to non-gender-balanced boards.

I first hypothesize that once a certain threshold of gender balance is crossed it increases the productivity of a board. … Read more

Yockey Headshot

Entity Choice and Anti-Corruption Compliance

Entrepreneurs are sometimes guilty of letting compliance slip down their list of priorities. They prefer to “move fast and break things”—an ethos that doesn’t always find time for bureaucratic niceties like employee handbooks and contracting guidelines.[1]

This dynamic raises issues on numerous fronts, but of particular concern to me is what it means for anti-corruption compliance. As American entrepreneurial activity continues to permeate developing economies, many of the most promising markets in Europe, South America, and Asia feature widespread corruption. Actions as simple as subscribing to Internet service or receiving goods through customs often come part and parcel with … Read more

Latham & Watkins explains US Loan Market Adaptations to European Bail-In Directive

European Economic Area (EEA) financial institutions are now subject to a new set of regulatory requirements designed to avoid taxpayers bailing out banks in the event of another banking crisis — a central component of which is that EU member state bank regulators have been provided with broad new “bail-in” powers to write down (including to zero), convert to equity or otherwise modify unsecured liabilities of failing financial institutions.
These new rules require an “EEA financial institution” (defined below) to include a “contractual recognition of bail-in clause” in almost every document to which it is a party that is governed … Read more

Choi, Erickson, Pritchard

Piling on? An Empirical Study of Parallel Derivative Suits

When it comes to corporate litigation, is more necessarily better? The legal system has developed a broad array of litigation options to address corporate wrongdoing. Under state law, shareholders can file a derivative suit or class action alleging that directors and officers breached their fiduciary duty. Under federal law, shareholders can file a securities class actions alleging that the directors and officers misled the market. These private lawsuits are often filed alongside government enforcement actions brought by the Securities & Exchange Commission, the Department of Justice, or state regulators.

In our article, Piling On: An Empirical Study of Parallel Derivative Read more

Wachtell Lipton discusses Short-Term Investors, Long-Term Investments, and Firm Value

A January 2016 study, Short-Term Investors, Long-Term Investments, and Firm Value, by Martijn Cremers, Ankur Pareek and Zacharias Sautner, provides substantial “empirical” evidence for the fact that, in the current corporate governance environment, short-term investors possess the undue ability to pressure companies into maximizing near-term gains at the expense of long-term growth.

The study finds that after short‐term investors become shareholders of companies, those companies tend to decrease spending on R&D, and tend to experience temporarily increased earnings and stock prices. The results further indicate that when the short-term investors leave, these trends are all reversed, “so that … Read more

Jeffus and Krigman

IPO Pricing as a Function of your Investment Banks’ Past Mistakes: The Case of Facebook

On May 18, 2012 Facebook (FB) held its initial public offering (IPO) on NASDAQ, raising over $16 billion making it one of the largest IPOs in history. To the surprise of many investors, there was almost no underpricing, as the stock closed the first day of trading almost flat from its offer price. The IPO was described as not only disappointing but also detrimental to the broader market in the financial press. The “failed” FB IPO was blamed for causing everything from mutual funds’ declines in assets under management to significant increases in IPO underpricing, to subsequent canceled IPOs. We … Read more

Arthur Gallagher discusses Study of 2014 Short- and Long-Term Incentive Design Criterion

In order to investigate what (and how much) is being reported in annual proxy statements about executive pay packages and how incentive pay is designed, Arthur J. Gallagher & Co.’s Human Resources & Compensation Consulting Practice (formerly James F. Reda & Associates a Division of Gallagher Benefit Services, Inc.), has conducted a study of the 2015 annual proxy statement disclosures for 200 of the top U.S. companies (based on revenue and market capitalization). This is the seventh consecutive year we have conducted this in-depth analysis for the top-200 public companies.

It has been almost five years since the Dodd-Frank Wall … Read more

Gennaro Bernile, Vineet Bhagwat, P. Raghavendra Rau

What Doesn’t Kill You Will Only Make You More Risk-Loving: Early-Life Disasters and CEO Behavior

During most of Steve Job’s tenure as CEO of Apple Inc. the company did not have any long-term debt obligations. Apple started an aggressive buyback program only after Tim Cook took over, at the same time that it added debt to its capital structure. Coincidentally, San Francisco, where Steve Jobs was born, experienced more disaster-related fatalities during Jobs’ formative years than Tim Cook’s birthplace of Mobile, Alabama. Could this anecdote be indicative of a deeper pattern, where personal experience of traumatic events shapes how a person views financial risk-taking?

A manager’s ability to assess and cope with risk has pervasive … Read more

Wulf Kaal

Implications of Mutual and Private Fund Convergence

Mutual funds are becoming more like hedge funds as a matter of investment strategy while hedge funds are becoming more like mutual funds as a matter of the regulatory framework. The growth of the private fund industry and the proliferation of retail alternative funds in combination with the fundamental regulatory reform of the private fund industry through the Dodd-Frank Act and the JOBS Act make the convergence of mutual and private funds possible. Such convergence has large implications for the evolution of the private fund industry and the growth of the retail alternative fund market.

For most of their history, … Read more

Cruces & Samples Photo

Time to Settle Sovereign Debt’s “Trial of the Century”?

Once again, NML v. Argentina is in the spotlight. Sovereign debt’s “trial of the century”[1] has been the focal point of intense academic and policy debates, prompted a Supreme Court decision, and even triggered a contested default by Argentina in 2014. But the spotlight now points in a different direction. With a newly elected government, Argentina’s decade-long standoff with holdout creditors is set for negotiations—and potentially—a final settlement. In our article, we analyze key economic and legal factors underlying the NML litigation, with a particular emphasis on issues relevant to a potential settlement.

Argentina’s Holdout Litigation

Argentina’s … Read more

Fried Frank explains Chancery Court Decision Providing Guidance on Post-Closing Fraud by Buyer of Portfolio Company

In a recent decision relating to the sale of a portfolio company by one private equity firm to another—Prairie Capital v. Double E (Nov. 24, 2015)—the court provided important guidance with respect to a buyer’s ability to make post-closing fraud claims against a portfolio company’s executives and its private equity fund sellers.

Significance of the decision

  • Reminder that representations and warranties in the sale agreement affect not only indemnity claims but fraud claims. The decision serves as a reminder that, in a sale agreement that includes a typical non-reliance provision (i.e., a statement that the buyer has not relied

Read more

Tom C.W. Lin

Infinite Financial Intermediation

Intermediation is a fundamental fact of finance. Investment banks underwrite stock offerings for companies. Commercial banks safeguard the savings of workers. Fund managers invest the pensions of retirees. Exchanges match orders of buyers and sellers. Brokers facilitate trades of investors. Credit card companies advance funds to consumers. Collectively, these and other intermediaries form the fabric of modern finance. Yet in the face of all these financial links, entrepreneurs and and technologists continue to endeavor toward the possibilities of fundamentally disrupting and disintermediating these existential financial ties with innovations like ApplePay, Square, and Venmo.

Despite numerous extraordinary innovations in finance, true … Read more

John Coffee, Headshot

Hedge Fund Activism: A Guide for the Perplexed

The message of the Dow/DuPont merger and split up is simple: No firm is today “too big to target.” Activists can see the transaction as evidence that, even in the rare case where they lose a proxy fight (as they did at DuPont last year in a squeaker), the handwriting is still on the wall, and their game plan, if appealing, will ultimately prevail.  Even though Trian could not win a majority vote to seat its candidates on the DuPont board, it held onto its stake, and the DuPont board quickly ditched their CEO in the wake of that fight … Read more

Davis Polk explains SEC’s Proposal of New Transparency Requirements for NMS Stock Alternative Trading Systems

On November 18, 2015, the Securities and Exchange Commission (“SEC”) proposed amendments (the “Proposal”) to Regulation ATS and related rules under the Securities Exchange Act of 1934 (the “Exchange Act”) to impose extensive new transparency requirements on, and greatly increase the SEC’s active oversight of the design of, alternative trading systems (“ATSs”) that facilitate transactions in National Market System stocks (generally, exchange-listed equities) (“NMS Stock ATSs”).

The extensive level of disclosure that would be required under the Proposal and the SEC’s ongoing involvement in approving or reviewing the design and … Read more

Weber and Yang

The Debt-Equity Choice When Securities Regulations are Scaled by Equity Values: Evidence from SOX 404

Section 404 of the Sarbanes-Oxley Act of 2002 (SOX 404 hereafter) and the associated implementation guidance require firms’ management and independent financial statement auditor to formally document, test, and report publicly in the annual Form 10-K on the effectiveness of internal controls over financial reporting. The costs of complying with this requirement are substantial and include a significant fixed component, making them particularly burdensome for small firms (e.g., Engel et al. 2007; Kamar et al. 2007; SEC 2009; Alexander et al. 2013). As a result, the Securities and Exchange Commission (SEC) delayed the implementation of SOX 404 several times for … Read more

Steven Schwarcz, J.D.
Stanley A. Star Professor of Law & Business

Securitisation and Post-Crisis Financial Regulation

There are few types of debt as internationally issued and traded as the debt securities issued in securitisation (in the United States, spelled securitization) transactions. European investors commonly invest in securities issued in U.S. securitisation transactions, and vice versa.

It is generally agreed that securitisation’s abuses contributed to the global financial crisis. Repayment of securities issued in certain highly leveraged securitisation transactions was so sensitive to cash-flow variations that, when the cash-flow assumptions turned out to be wrong, many of these highly rated securities defaulted or were downgraded. That, in turn, sparked a loss of confidence in the value of … Read more

McDermott Will & Emery discusses ISS Issuance of Acceptable Parameters for Proxy Access Provisions

Institutional Shareholder Services Inc. (ISS) recently issued, in the form of Frequently Asked Questions, a further update to its 2016 proxy voting guidelines to outline the types of management-sponsored proxy access provisions that ISS will deem responsive to shareholder-supported proxy access proposals, and those that ISS will deem too restrictive of shareholders’ ability to nominate director candidates or propose other items of business at annual shareholder meetings through the company’s proxy statement. With more than 90 shareholder proposals made at annual meetings in 2015 (more than 50 of which received majority support), proxy access has gained considerable momentum and … Read more


Chipping Away at Financial Reporting Quality

Because of the separation of ownership and control of public companies, the quarterly earnings that firms report are immensely important to outside investors. They are the most relevant barometer of not only a company’s recent past performance, but also of its prospects for success in the future. The importance of “high quality” earnings – those that most accurately reflect the economic fundamentals of a company – has been demonstrated by researchers showing that they increase capital allocation efficiency (Biddle and Hilary 2006; Biddle et al. 2009), lead to a lower cost of capital for the firm (Aboody et al. 2005; … Read more

Jason Parsont

The SEC’s Evolving Integration Doctrine: New Guidance on Combining Offering Methods

In 2015, in a trilogy of releases on early-stage capital-raising,[1] the U.S. Securities and Exchange Commission (the “SEC“) took bold steps to clarify its integration guidance. The result changes the textbook[2] on how various securities-based offering methods can be combined. Principally, a long-required five-factor test that often blunted the concurrent use of different offering methods has now been replaced in many contexts with a unitary framework focused on whether advertising and solicitation in one offering is improperly conditioning the market for another. In addition, updated integration safe harbors permit (or propose to permit) the serial use … Read more