One of the primary rationales in favor of regulating disclosure is that more information may create positive externalities, or spillover effects, by helping investors learn about industry- or economy-wide trends and growth opportunities. In this way, a firm’s public disclosures informs investors not only about that specific firm’s prospects, but also about the prospects of related, peer firms. Thus, the more firms within an industry disclosing regular, publicly available information, the less uncertainty exists among investors regarding the value of all firms in that industry. Although the idea is intuitive, it has been difficult to empirically examine the existence of … Read more
The work of Columbia Law School Professor Kate Judge appears in the list of twelve best corporate and securities law articles in 2015, based on a poll conducted by the Corporate Practice Commentator. Teachers in corporate and securities law were asked to select the best corporate and securities articles from a list of articles published and indexed in legal journals during 2015. More than 540 articles were on the list. Professor Judge was selected for her article Intermediary Influence appearing in the University of Chicago Law Review.… Read more
In April of 2012, President Obama signed into the law the J.O.B.S. (Jumpstart Our Business Startups) Act. The law’s intent and design was to make it easier for small businesses to raise money by easing their regulatory burdens both on raising capital and operating as publicly traded companies on an ongoing basis. This article focuses on the J.O.B.S Act’s Title IV. Title IV revises an exempt offering provision referred to as Regulation A. Prior to its revision, Regulation A was a seldom used offering exemption because companies felt that the steps necessary to complete a Regulation A offering far outweighed … Read more
In an article recently posted on SSRN.com, I explain why the law requires agents to act with single-minded devotion to their principals. For example, a lawyer must do what is best for a client and may not subordinate a client’s interest to that of anyone else. This is true even when a lawful act beneficial to a client would subject a third party to serious harm. When representing a landlord who wants a derelict tenant evicted, for example, a lawyer must prosecute the eviction expeditiously even if the tenant has nowhere else to go.
In the parlance of legal … Read more
Intra-corporate dispute (ICD) arbitration may cover a wide range of disputes between shareholders, between shareholders and the company, and between shareholders and third parties such as the company directors. ICD arbitration has been practiced in the US for many years for resolving disputes both in non-listed and listed companies. It has also been used for shareholder claims for breach of fiduciary duty against the company’s directors in a takeover bid (tender offer). In my paper, I argue for the UK to facilitate ICD arbitration more widely and, in particular, for UK listed companies. However, I also discuss that although the … Read more
Whether one ascribes to the agency theory of shareholder primacy or the contractarian theory of director primacy, boards of directors have great discretion in determining whether, when, and how to sell the corporation. Defensive tactics, like poison pills, can be tools in wielding that discretion in the service of creating shareholder value. However, a poison pill designed either to oppress a minority shareholder, as in eBay v. Newmark, or to minimize the impact of activist shareholders, as in Versata Enterprises, Inc. v. Selectica, Inc., seems to exceed the “maximum dosage” of the pill. The “tax benefits preservation … Read more
To achieve a growing number of public, social, civic goals, we draw on the power of financial markets. Parents who can afford to save for the cost of their children’s college education rely on the market when they put money into college savings plans like New York’s 529 College Savings Program, for example, and so do workers counting on pension funds to provide income in retirement.
As long as these investments produce the needed return, all is well, but when they do not, they undermine the public end they were supposed to serve. The riskiness of investments made in service … Read more
A corporate inversion involves the relocation of a corporation’s legal domicile to a lower-tax nation (host country) while retaining its material operations in its higher-tax country of origin (home country). Corporations have been engaging in inversions for over three decades. The first inversion in 1982 occurred when Louisiana-based construction firm McDermott International converted one of its cash-rich Panama-based subsidiaries into the new parent firm, thereby paying much lower income taxes.
Corporate inversions have become headline news again in the US. Last year, US-based pharmaceutical company Pfizer announced a merger with Ireland-based Allergan. Pfizer expected to reduce its effective tax rate … Read more
Regulators demand the impossible when they require issuers to design and implement an effective compliance program to guard against insider trading, a crime that neither Congress nor the SEC has defined with any specificity. This problem is then compounded by the threat of heavy civil and criminal sanctions for noncompliance. Placed between this rock and hard place, issuers adopt over-broad insider trading compliance programs that come at a heavy price in terms of corporate culture, cost of compensation, share liquidity, and cost of capital. The irony is that, since all of these costs are passed along to the shareholders, insider … Read more
There has been a recent surge in scholarship on the issue of concentration of power in the CEO, and the subsequent consequences for shareholder wealth maximization and board primacy. There is a general consensus among scholars that, in general, more powerful CEOs (relative to the board as representative of the corporate shareholders) can exacerbate agency conflict, resulting in suboptimal corporate strategies that are detrimental to corporate performance, and as a result, damaging to shareholder interests as well. The basic cause of this excessive power with CEOs lies in the outside board members being dependent on the CEO for their selection, … Read more
The equitable doctrine in pari delicto provides that a plaintiff who participated equally with a defendant in wrongdoing cannot pursue a claim against the defendant. In pari delicto is a shortened version of the phrase in pari delicto potior est conditio defendantis, which means “[i]n a case of equal or mutual fault . . . the position of the [defending] party . . . is the better one.”
Lawyers invoke in pari delicto when sued for malpractice for failing to protect a client from legal liability. A common scenario involves a lawyer advising a client to lie under oath; … Read more
In our recent paper forthcoming in The Financial Review (2016), we highlight the role of venture capital (VC) in spawning new ventures. That is, after acquisitions, IPOs and other successful exits, entrepreneurs backed by venture capitalists (VCs) tend to form new companies or become angels coaching and investing in entrepreneurs. In our recent paper, we examine for the first time the specific conditions under which entrepreneurs actually stick with entrepreneurship in the form of starting a new company or becoming an angel. We address the question of when does entrepreneurial finance spawn the creation of new ventures by examining detailed … Read more
Global business puts pressure on geographically limited courts. U.S. courts, for instance, can reach only defendants with contacts with the forum territory, usually the specific U.S. state in which the court is located. But litigation may be brought against part of a multinational business that has separately organized entities in different countries. Often the local subsidiary has direct contacts, but the plaintiffs want to sue the absent parent as well. Can they? The somewhat unsatisfactory answer is that it depends. Often it depends on whether the local subsidiary’s contacts with the forum territory “count” as those of the parent company. … Read more
Corporate governance scholarship has long considered the problems that arise in public companies with dispersed ownership. But the automaker Volkswagen does not suffer from a dispersed ownership structure. In fact, it has several strong and highly active owners. The Porsche and Piëch families have been involved with the company for many years and own 31.5% of Volkswagen’s equity. The German state where the company is headquartered, Lower Saxony, holds 12.4%, and an outside investor, Qatar Holding, owns 15.4%. With such powerful economic incentives in not one but three actors, management should have been subject to the kind of exacting oversight … Read more
In a recent paper, I considered the strength of securities fraud charges asserted in several computer hacker cases filed in mid-2015. Some of the defendants in the cases were the hackers who used computer methods to obtain unauthorized access to corporate press releases before they were released to the public. Other defendants were the traders who paid for the stolen information and used it to buy and sell securities. The press cast the scheme as an insider trading ring tied to computer hackers, but the SEC and criminal authorities asserted general securities fraud charges under Rule 10b-5.… Read more
Hedge fund activism is the latest rave in corporate governance. Activist hedge funds build stakes in target firms in order to press management for various changes. When managers are uncooperative, they may just be forced to step down. Lest you think only managers of small, not well-established firms have reason to fear, some of the most powerful managers in corporate America, for example the CEOs of Bob Evans, Hertz, Sotheby’s, Yahoo, etc., have all failed to avoid such fate. It appears that no firm is immune to the threat of HFA.
Managers, needless to say, have great incentive to avoid … Read more
Congress expanded the SEC’s ability to pursue enforcement actions in administrative proceedings in the Dodd Frank Act, bringing the agency’s use of proceedings before its own administrative law judges (ALJs) into the spotlight. A number of respondents have challenged the constitutionality of these proceedings, relying principally on arguments arising out of the Appointments Clause of the Constitution. Those disputes are currently being played out both before the SEC and in the courts, but they are unlikely to be a long-term obstacle to the SEC’s use of administrative proceedings.
Just six months ago, when the Supreme Court’s current term opened in October, things looked bleak for the class action. Three major cases were on the Court’s docket, and each seemed handpicked as a vehicle for the Court’s conservatives to curb the availability of the class action. Nonetheless, it has now become clear that this assault has fallen short. The high water mark in this hostile tide was probably reached in 2011 when the Court decided both Wal-Mart Stores, Inc. v. Dukes and AT&T Mobility LLC v. Concepcion. In these cases, the Court both tightened the standards … Read more
Options backdating? Who would be so arrogant to be still backdating their options? It has been exactly ten years since the Wall Street Journal’s exposé on “lucky CEOs.” The intriguing question though is whether the executives could resist temptation for ten years. We decided to find out. We find that despite all the reforms enacted in response to the backdating scandal of 2006, manipulation of stock options as a form of incentive compensation is once again alive and well.
Let’s digress and explain the background first. Backdating an option refers to the practice of fraudulently picking a date in … Read more