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Short-Term Institutions, Analyst Recommendations, and Mispricing: The Role of Higher-Order Beliefs

Discussions on the role of higher-order beliefs (investor beliefs about the beliefs of other investors) in financial markets can be traced back to Keynes’ (1936) comparison of the stock market to a beauty contest. Investors “are concerned,” he famously said, “not with what an investment is really worth to a man who buys it for keeps, but with what the market will value it at [. . .] three months or a year hence.” Interest in higher-order beliefs models continues today. An anecdotal example of the role of higher-order beliefs is the downgrade of Citigroup by analyst Meredith Whitney in … Read more

SEC Chair Gensler Discusses Crypto Regulation

Some might wonder: What does the SEC have to do with crypto?

Further, why did an organization like the Aspen Security Forum ask me to speak about crypto’s intersection with national security?

As is customary, I’d like to note that my views are my own, and I’m not speaking on behalf of the Commission or the SEC staff.

Let me start at the beginning.

It was Halloween night 2008, in the middle of the financial crisis, when Satoshi Nakamoto published an eight-page paper[1] on a cypherpunk mailing list that’d been run by cryptographers since 1992.[2]

Nakamoto — we … Read more

National Blockchain Laws Are a Threat to Capital Markets Integration

Since its creation in 2008, the blockchain has seemed incompatible with legal constraint. Satoshi Nakamoto, the pseudonymous inventor of Bitcoin, hailed the blockchain’s “unstructured simplicity.” Even now, apostles of distributed ledger technology (DLT) strongly resist the idea that it needs regulation, arguing that it was designed precisely to avoid centralized control.

This did not, however, stop courts and legislators around the world from becoming increasingly concerned about DLT. They are no longer focusing only on the dangers cryptocurrencies might pose to the public, such as its potential use in money-laundering, the financing of terrorism, or tax … Read more

Wachtell Lipton Discusses Mandatory Climate Change Disclosure Rules – A Preview From the SEC Chair?

As noted in our previous memos, the SEC is considering and has sought input from investors on potential new disclosure requirements related to climate change and other sustainability issues.  Yesterday, SEC Chairman Gary Gensler made remarks that add some clarity as to what can be expected:  a combination of qualitative and quantitative climate-risk disclosures that are consistent, comparable and decision-useful to investors. Examples of potential qualitative disclosures include how the company’s leadership manages climate-related risks and opportunities, how such matters impact corporate strategy and, potentially, the use of scenario analyses.  Quantitative disclosures may include disclosure of Scope 1, 2 … Read more

Corporate Social Responsibility by Joint Agreement

Voluntary industry-wide agreements have recently emerged as a way to promote corporate social responsibility (CSR). Competitors in industries as diverse as chocolate production, fashion design, and truck manufacturing aspire together to pay fair wages or transition to less polluting products. A growing management literature endorses the idea. Henderson (2020), for instance, calls for “industry-wide cooperation” to stop environmental degradation and economic inequality.

Joint decision-making allegedly would help reduce first-mover disadvantages that can dissuade companies from acting responsibly if it puts them at a competitive disadvantage. Firms coordinating their business decisions, however, raises antitrust concerns. To believers in the effectiveness … Read more

McMillan Discusses Key Considerations in Implementing Shareholder Votes on Climate

As the momentum of shareholder engagement on climate-related matters continues to grow across the globe, including in Canada, these issues remain a key focus area for public companies. One of the tools that has gained prominence is the so-called “Say on Climate” vote, where shareholders vote on their company’s climate policies.

The initiative, launched by Christopher Hohn, a British fund manager, in conjunction with his investment firm The Children’s Investment Fund Management (“TCI”), was first implemented by Aena, a Spanish airports group, in 2020. Since then, several other blue-chip firms like Unilever, Glencore, and CNRead more

A Social Enterprise Company in EU Organizational Law?

In my recent article, A Social Enterprise Company in EU Organizational Law?, I discuss the present and future regulation of social enterprises in Europe. For the moment, social enterprises – like other “social economy” organizations – have been harnessed to act as surrogates for governments in coordinating the administration, financing, and implementation of domestic social and welfare policy.[1] To a greater or lesser extent, therefore, social enterprises are regulated domestically by individual member states of the EU (“Member States”), “with little private leeway for initiative-taking outside government policy”.[2] This means that social enterprises do not enjoy the … Read more

The Choice Between Various Freeze-Out Procedures and Its Consequences

Over the past two decades, delisting from an exchange has become a popular choice for many public companies. Several studies attribute this trend to a number of factors, including the increased concentration of U.S. markets, which made many small and medium size public firms less viable; tightening of regulatory requirements (SOX, for example); and emergence of capital-raising alternatives for small and medium size private firms (for example, private equity funds). In sum, the net benefit of staying an exchange-listed firm has diminished, and various going private legal procedures have become popular.

The most common delisting method in the U.S. is … Read more

SEC Chair Gensler Speaks on Climate Risk and Disclosure

It’s good to be here with the Principles for Responsible Investment. As is customary, I’d like to note my views are my own, and I’m not speaking on behalf of the Commission or the SEC’s staff.

Before we get to the main event — on climate and finance — I’d like to discuss something a lot of us are watching these days: the Olympics.

In the Olympics, there are rules by which we measure an athlete’s performance.

In gymnastics, for example, the scoring system is both quantitative and qualitative. Athletes are evaluated based on the numeric difficulty of the skills … Read more

Do Firms in Developing Countries Use Dividend Policy to Build Trust with Investors?

How do companies based in countries with weak government institutions earn the trust of minority investors and raise capital? Where the rule of law and government enforcement cannot control corruption, insiders seem free to expropriate their company’s resources, making it essential for them to somehow assure  potential outside investors that they can be trusted. Establishing trust is especially important for growing firms that have profitable investment opportunities and are most in need of external capital.

One promising approach to building trust might be to pay a dividend – there is credibility in cash. However, paying a fixed dividend consistently, as … Read more

Arnold & Porter Discusses Criminal Antitrust Risks in Mergers & Acquisitions

On July 9, President Biden issued an Executive Order that announced a policy of increased antitrust enforcement across many industries. The DOJ Antitrust Division and the Federal Trade Commission quickly followed with an announcement that they would jointly launch a review of merger guidelines with an eye towards a more aggressive enforcement approach.

These announcements serve as an important reminder that the risks resulting from more vigorous merger review are not limited to getting the deal through. Companies and their investors should also consider the risks posed by criminal antitrust investigations that can follow merger review. One need look no … Read more

Corporate Governance, the Depth of Altruism, and the Polyphony of Voice

This post responds to the paper, Exit vs. Voice, by Eleonora Broccardo, Oliver Hart, and Luigi Zingales (BHZ),[1] a deep engagement with the choice between alternative means by which an “altruistic” investor can influence corporate behavior.  An “altruistic” investor is one who derives some utility from conferring a social benefit with the goal of inducing firms to change their behavior in a socially responsible way.  The two possible mechanisms are “exit” (divestment) and “voice” (shareholder voting).

BHZ follow prior work by Hart and Zingales that argues that investors can reasonably believe that firms can provide public goods at a … Read more

ISS Discusses the Largest U.S. Securities Class-Action Settlements by State

Since its inception, ISS Securities Class Action Services LLC (“ISS SCAS”) has tracked more than 13,000 shareholder class actions across the world, including 12,000+ cases within the United States. In this report, ISS SCAS closely examines the largest securities class action settlements by U.S. state, as well as the District of Columbia.

In the first edition of this report, published in 2018, ISS SCAS identified 48 cases as the largest securities class action settlements, by total settlement amount and by state. In this updated version, ISS SCAS provides a refresh of the data, including recently settled cases that now meet … Read more

Reforming the Macroprudential Regulatory Architecture in the United States

When the COVID-19 pandemic shuttered major economies in March 2020, it also wreaked havoc on financial markets. In the first few weeks of March, investment-grade corporate bonds lost roughly a fifth of their value, on par with the declines in equity and high-yield debt. (Haddad et al., 2020; Falato, Goldstein & Hortaçsu (forthcoming)). Contrary to the usual flight to quality, in mid-March, U.S. Treasury yields began rising and only stabilized after the Federal Reserve initiated a massive purchase program. (Vissing-Jorgensen, 2020). The distress in the Treasury market accentuated distress in other markets and liquidity challenges for firms. Nonbanks that service … Read more

Debevoise & Plimpton Discusses New Privacy Legislation in the U.S.: The Patchwork Problem Grows

Colorado has just adopted a brand-new data privacy law and Nevada has just significantly amended its law. These changes add rights for consumers, and compliance obligations for businesses, that take the U.S. further in the direction of European-style privacy law. Colorado and Nevada join California and Virginia in adding to the growing patchwork of disparate state laws — making it that much harder for any business seeking to have a single privacy program that is compliant everywhere.

Privacy bills also recently were considered in New York, Florida, and Washington, but did not pass; these bills or others like them are … Read more

Why We Need to Verify and Unmask the Identity of Cryptocurrency Users  

Cryptocurrencies are by now widely known as electronically generated and stored currencies that enable users to trade tokens. The tokens are exchanged anonymously through a decentralized payment system: the blockchain. To further anonymity, the parties to cryptocurrency transactions are identified by a unique string of random numbers rather than by a name or other personal information.

There is however a dark side to this anonymity. It makes it easier for criminals and terrorists to launder money and otherwise transact illegal business. For example, anonymous tokens provide terrorists with access to cash that is essential to organizing attacks without dependency on … Read more

ISS Discusses Increase in Class Action Settlements for First Half of 2021

As the U.S. and countries around the globe attempt to control the Coronavirus pandemic, investors continue to experience meaningful recoveries from securities-related class action settlements.

In the first half of 2021 (January 1 – June 30), U.S. class action settlements totaled $2.32 billion, an increase of 11.5% over the same period in 2020. More impressively, a total of 59 cases settled during the first six months of 2021, an increase of 34.1% over the same period in 2020. The average value of settlements, however, dropped by 16.9% ($39.3 million in 2021 vs $47.3 million in 2020).

The total settlement dollars … Read more

Does Proxy Advice Allow Funds to Cast Informed Votes?

Our examination of the votes cast by 155 mutual funds on over 6 million corporate election items during 2004-2017 led us to a surprising conclusion: We found that Institutional Shareholder Services’ (ISS) proxy advice did not lead funds to vote as if they were informed – more often than not it pushed them in the opposite direction.

The purpose of proxy advice is to allow funds to cast their votes as if they were informed, without having to actually become informed. Given the centrality of proxy advice in today’s corporate elections, the viability of shareholder democracy hinges on the advice’s … Read more

SEC Chair Gensler Speaks Before ABA Derivatives and Futures Law Committee

Thank you for the kind introduction. It’s good to be back with the American Bar Association’s Derivatives and Futures Law Committee.

As is customary, I’d like to note that I’m not speaking on behalf of my fellow Commissioners or the SEC staff.

When I first appeared before this committee more than a decade ago, Washington was still developing the regulatory response to the 2008 financial crisis.

That crisis had many chapters, but a form of security-based swaps — credit default swaps, particularly those used in the mortgage market — played a lead role throughout the story.

International banks were using

Read more

Capital Discrimination

In 2014, Diane Straka, along with three male associates, formed a corporation for the purpose of providing accounting services.  Each of the founders was an officer, director, and 25 percent shareholder of the new entity.  A problem soon emerged: One of the corporation’s employees taunted Straka with sexist jokes and cartoons in the office, and her fellow shareholders refused to rein him in.  Additionally, Straka’s work was undermined by some of her co-owners, who condescended to her and countermanded her decisions.  Eventually, Straka left the firm and brought a lawsuit in New York State court alleging shareholder oppression.  Oppression is … Read more

SEC Commissioner Peirce Speaks on ESG Disclosure

This summer was the summer of the cicadas. The dull hum of their song permeated the solitude of an evening stroll, along with the disconcerting crunch as pedestrian attempts to avoid squashing the creatures inevitably failed. Every seventeen years the beady-eyed cicadas emerge from underground—a natural wonder, perhaps therefore to be forgiven for their uncouth habits and off-putting appearance.[1] As eighteenth century farmer and self-taught naturalist Benjamin Banneker, having observed three appearances of cicadas, wrote:

[I]f their lives are Short they are merry, they begin to Sing or make a noise from the first they come out of Earth … Read more

How Does Removing the Tax Benefits of Debt Affect Firms?

Almost all countries have historically allowed businesses to write off interest expenses against taxable income. Critics argue that the tax-favored status of debt has created a corporate debt pile-up, thereby exacerbating economic downturns. This argument, which gained more attention after the 2008 global financial crisis, implicitly assumes that the tax incentives have led to a large increase in the use of debt. However, despite extensive efforts by researchers, it is an open question whether the tax incentives are indeed a primary determinant of corporate debt policy. This is mainly because isolating the impact of interest deductions from other tax effects … Read more

Wachtell Lipton Discusses the Purpose of the Corporation

In recent years, the concept of “corporate purpose” has been invoked as a shorthand to address a corporation’s commitment to include stakeholder governance—and with it commitments to sustainability, diversity, inclusion, social responsibility and other ESG issues—as part of a corporate strategy that achieves sustainable long-term growth and creates long-term value for the benefit of all stakeholders.

Recognizing the importance of corporate purpose in helping guide efforts to build back better following the pandemic, a distinguished group of academics at Oxford University formed the “Enactment of Purpose Initiative.”  The Initiative seeks to encourage the elemental constituencies of a corporation—directors, management, asset … Read more

How Quarterly Financial Reports Affect Employee Job Search

Quarterly financial reports are an important way for companies to communicate with the capital market, and they clearly affect firms’ access to debt and equity capital. However, the most scarce and sought after resource for many modern, cash-rich companies is not financing but people: human capital. For example, 27 percent of U.S. employees voluntarily changed jobs in 2019, costing firms an estimated $475 billion. For perspective, the total interest expense reported by public companies was $467 billion, indicating that the cost of voluntary employee turnover is comparable to firms’ external cost of debt. Total turnover-related costs are even larger when … Read more

Paul Weiss Discusses New York Legislation to Expand Antitrust Law

During its last legislative session, the New York Senate passed the Twenty-First Century Anti-Trust Act, which, if enacted, would have amended the Donnelly Act, New York’s antitrust statute. While the bill did not come to a vote in the Assembly before the session ended, one of the bill’s sponsors has indicated that it may be re-introduced in the next session. This is the second time in recent years that a bill was introduced to amend the Donnelly Act, and this iteration is more expansive than the prior proposal, which we discussed in a prior memorandum. If this or … Read more

Liberating the Market for Corporate Control

In a new article, Liberating the Market for Corporate Control, we recommend that state corporate law statutes be amended to include a safe harbor for hostile bidders who make all-cash, all-shares tender offers that include a guarantee of the same or higher price if a back-end or squeeze-out merger occurs. Thus, in the face of a non-coercive hostile bid, a board cannot use takeover defenses, such as a poison pill or other statutory defense, unless specifically provided for in the corporate charter. In this way, if the board and shareholders agree, a company can always use private ordering to … Read more

Does the Strength of Investor Protection Laws Predict Capital Market Development?

Which countries provide the strongest investor protection laws? How are such laws related to the level of capital market development and ownership concentration in public companies? In a series of influential works, La Porta, Lopez-de-Silanes, Shleifer and Vishny (1997, 1998, 1999) report that investor protection laws are largely determined by a country’s legal origin, with common law countries generally providing the strongest ones.[1] These scholars also contend that countries with the strongest such laws tend to have the most developed capital markets and the least concentrated ownership of shares in their largest public firms.  Further, the scholars advance a … Read more

Wachtell Lipton Discusses Important Supreme Court Business Cases Last Term and Next

The Supreme Court’s now-concluded October Term 2020 marked a slow return to normalcy following the disruption of the Covid-19 pandemic.  The Court released only 56 signed opinions — just a handful more than the prior Term, and well below the Roberts Court’s pre-pandemic average pace of 74.  Meanwhile, the Court continued a recent trend of robust activity on its so-called “shadow docket,” where it often resolves thorny issues presented in an emergency posture without oral argument and without a supporting description of its reasoning.  Resolved in this way were a number of commercially significant issues implicating pandemic-related emergency measures.  But … Read more

The Role of the External Auditor in Managing Environmental, Social, and Governance Reputation Risk

Companies are under increasing pressure to manage their reputations on environmental, social, and governance (ESG) issues. Some companies have lost revenue, gone bankrupt, been boycotted by customers, or otherwise suffered a decline in value because of a negative reputation on ESG. We refer to the risk of this decline in value as ESG risk. Managing ESG risk, adequately informing investors of ESG risk, and increasing financial support for sustainable activities are primary concerns of public companies and their regulators. The U.S. Securities and Exchange Commission (SEC) and the European Commission recently issued public statements and taken actions toward achieving these … Read more

Skadden Offers a Scorecard on Diversity in the Corporate Boardroom

The social and political disruptions of the past year have heightened the awareness of diversity challenges, including at public and private companies in the U.S.  In particular, the representation of women and other diverse individuals in the boardroom is of continuing relevance.  Last month, Deloitte and the Alliance for Board Diversity[1] published a comprehensive report analyzing the current makeup of boards of directors at Fortune 500 and Fortune 100 companies.[2]  That report concluded that the composition of boards at the country’s largest companies has not changed materially in the last several years.  Against this backdrop, a number of … Read more

Do Public Financial Statements Influence Venture Capital and Private Equity Financing?

Venture capital and private equity funds are important equity investors in private companies (Hand 2005; Stromberg 2008; Kaplan and Stromberg 2009), and their investments are characterized by an extensive search process that imposes significant upfront costs for the funds (Chen et al. 2010; Teten and Farmer 2010; Gompers et al. 2016, 2019).[1] We hypothesize that private companies’ public financial statements (and the information therein) can mitigate these costs by providing a relatively less costly screening tool to identify potential targets at the pre-investment stage. In particular, public financial statements can help VC and PE funds to identify potential investment … Read more

Paul Weiss Discusses DOJ and FTC Plan to Review Merger Guidelines

On July 9, President Biden signed a wide-ranging Executive Order on “Promoting Competition in the American Economy” which, among other things, encourages “the Attorney General and the Chair of the FTC . . . to review the horizontal and vertical merger guidelines and consider whether to revise those guidelines” in order “to address the consolidation of industry in many markets across the economy.”

In response, the Acting Assistant Attorney General for the Antitrust Division of the Department of Justice (DOJ) and the Chair of the Federal Trade Commission (FTC) issued a statement announcing that the agencies will undertake a review … Read more

The Evolution of Environmental Discourse in Conference Calls

Climate change disclosure ranks among the priorities of Gary Gensler, the new chair of the Securities and Exchange Commission. With the rapid reallocation of capital to green investments – characterized as a “tectonic shift” by BlackRock[1] and a “frenzy” by the Wall Street Journal[2] – concerns have arisen about whether disclosures accurately portray firms’ commitment to protecting the environment or simply represent “greenwashing.” Intensifying climate change and commensurate increases in political and financial support for positive environmental actions reinforces how climate change disclosures have become a priority.

As regulators try to determine what types and amount … Read more

Debevoise & Plimpton Discusses Impact of UK Climate-Related Financial Disclosures on Asset Managers

The Financial Conduct Authority recently announced a proposal for a climate-related financial disclosure regime for UK asset managers, as well as life insurers and FCA-regulated pension providers. This is an important step in the United Kingdom’s implementation of a regime that is similar to the European Union’s Sustainability Finance Disclosures Regulation (“SFDR”), although the United Kingdom’s regime for the time being focuses exclusively on climate-related disclosure, whilst the European Union’s regime encompasses environmental, social and governance considerations.

As under the EU regime, the FCA focuses on disclosure, with a view to influencing investors to commit capital to companies and projects … Read more

Risk and Ambiguity in Turbulent Times

Over the past 50 years, the financial markets have been rocked by major shocks, which have led to the introduction of financial instruments that could cope with uncertainty in general and extreme events in particular. To manage the uncertainty surrounding the financial markets, there was a need for reliable uncertainty indicators. The traditional measure of uncertainty―stock volatility―has been challenged by advanced statistical methodologies (GARCH) and derivatives-based forward-looking forecasts (VIX).  In a new paper, we discuss the history of volatility and uncertainty measures, their informativeness, and the information derived from volatility derivatives.

Volatility measures (simple historical volatility, ARCH/GARCH, and the VIX) … Read more

Hiding in Plain Sight: The Global Implications of Manager Disclosure

Delegated asset management, and mutual funds in particular, have become the investment vehicle of choice for retail investors in capital markets worldwide. At the end of 2020, open-end mutual funds had a total of $63 trillion in assets under management globally, and almost half of all U.S. households owned shares of a mutual fund (2021 Investment Company Fact Book).

While there are clear benefits to professionally managed and diversified investment funds, the potential for agency conflicts have long been a concern. Historically, financial regulators have relied on disclosure requirements for funds as the solution to these potential conflicts. … Read more

SEC Chair Calls for Transparency on What Funds Mean by Sustainability and Diversity

Thank you for the kind introduction. I enjoyed chatting with you a couple of weeks ago, Ed, and it’s good to meet with the whole committee for the first time.

I’m grateful for your time and willingness to give us advice on the asset management industry. I look forward to hearing the readouts from your various subcommittees on environmental, social, and governance investing; diversity and inclusion; and private investments.

I wanted to share some thoughts on these topics — in particular, on funds that hold themselves out to the public as investing with an emphasis on sustainability, and on diversity

Read more

Why “Ramping Up” Merger Enforcement Isn’t So Easy

Antitrust enforcement is garnering headlines everywhere—from Lina Khan taking the helm at the Federal Trade Commission (FTC) to the recent dismissal of the FTC’s and state attorneys’ general complaints against Facebook.  While these headlines reflect a healthy debate about the extent of regulatory enforcement, a remarkably bipartisan consensus is emerging around increased vigor in merger enforcement.  Drawing support from a broad array of constituencies—from those worried about increasing concentration of economic power to those worried about the power of big tech to limit social discourse—proponents of increased enforcement advocate for heightened merger standards.  Absent legislative changes (which certainly have been … Read more

Sullivan & Cromwell Discusses New FDIC Guidance for Specified IDIs’ Resolution Plans

On June 25, 2021, the Federal Deposit Insurance Corporation published new guidance for resolution plans to be filed by insured depository institutions with $100 billion or more in total assets. The guidance establishes a three-year filing cycle for these IDIs, with filers clustered into two groups; provides details regarding the content that filers will be expected to prepare; creates greater flexibility with respect to the incorporation of content from other sources; allows affiliated filers to submit a single, combined submission; and streamlines some of the content requirements that have proven to be less relevant to the FDIC after reviewing plans … Read more

How Does Private Firm Disclosure Affect Demand for Public Firm Equity?

In 2020, over 98 percent of the 40 million firms that disclosed detailed financial statement information worldwide were privately owned. Given their economic importance, the social value (or cost) of regulating private firm disclosures is likely significant, and how much to regulate these disclosures has been a central topic of debate among regulators. Key to informing this debate is understanding the potential spillover effects of these disclosures. While emerging research has made progress in investigating both the determinants and firm-level costs and benefits of private firm disclosures, relatively little is known about the spillover effects of these disclosures.

In a … Read more

When Forum Selection Clauses Bind Non-Signatories

When a company signs a contract containing a forum selection clause, it is clearly bound by that provision.  But what about its parent company?  Its subsidiaries?  Its affiliates?  Are these non-parties likewise bound by the forum selection clause?

The answer to this question, as it turns out, is surprisingly complex.  On the one hand, it is a well-established principle of contract law that a party may not be bound by an agreement without its consent.  On the other hand, the courts have over the years recognized a number of doctrines – including the law of third-party beneficiaries, equitable estoppel, agency, … Read more

Do Lawyers Make Good Gatekeepers?

Do lawyers report evidence of material violations up-the-ladder at the companies they represent, as the Sarbanes-Oxley Act and related regulations require? Have general counsel properly  investigated those reports? Can we trust lawyers to be effective gatekeepers and stop corporate misconduct? The answers to these questions have long been elusive, because corporate wrongdoing is inherently sensitive and confidential, and the actions of elite research targets are hard to observe. As we approach the 20th anniversary of Sarbanes-Oxley, though, it makes sense to revisit these questions and to evaluate the impact of one of the statute’s most controversial provisions, Section 307. … Read more

Debevoise & Plimpton Discusses SEC’s Spring 2021 Agenda

On June 11, 2021, the Securities and Exchange Commission (the “SEC”) released Chair Gary Gensler’s Spring 2021 regulatory agenda, which sets out the short- and long-term regulatory actions that the SEC plans to take.[1]  The agenda includes potential rulemakings specific to private funds and their investment advisers – such as amendments to the Custody Rule under the Investment Advisers Act of 1940 (the “Advisers Act”), amendments to Form PF and a potential new ESG rule applicable investment companies and investment advisers – and broader rules (and requests for comments on existing rules) that could affect … Read more

Entrenchment or Efficiency? CEO-to-Employee Pay Ratio and the Cost of Debt

Critics have argued that the rule requiring companies to disclose the ratio of CEO compensation to employee pay is too expensive and time consuming, with the U.S. Chamber of Commerce estimating the cost to U.S. companies at more than $700 million per year. The Securities and Exchange Commission, however, has put the annual cost at about $73 million[1], and in 2015 its commissioners voted 3-2 to adopt the rule. Since then, income inequality has reached unprecedented levels, and the CEO-to-employee pay ratio has skyrocketed. According to the Economic Policy Institute, the ratio was on average 21-to-1 in 1965 but grew … Read more

SEC Chair Gensler Speaks at London City Week

I’m honored to be speaking again at London City Week. It’s been eight years since I last spoke here. That was about benchmark interest rates and the London Interbank Offered Rate (LIBOR). I may come back to that, but I’m mostly going to take the opportunity to discuss three key areas of the reform agenda at the Securities and Exchange Commission. As is customary, I’d like to note that I’m not speaking on behalf of my fellow Commissioners or the SEC staff.

The SEC was set up in the 1930s by Franklin Delano Roosevelt and the U.S. Congress to look

Read more

The Impact of Mandatory Gender Pay Gap Disclosure in the UK

Firms are coming under increasing pressure to close and disclose their gender pay gaps. The pressure stems from several sources, including, (i) socially conscious investors; (ii) interest groups advocating the incorporation of ESG factors into corporate decision-making and stakeholder capitalism more broadly; (iii) influential capital market intermediaries such as index providers; and (iv) regulators. For example, in recent years the U.S. Securities and Exchange Commission (SEC) has implemented new rules requiring firms to make disclosures about human capital and, more generally, has increased its focus on diversity, equity, and inclusion (DEI) initiatives within public companies.[1]

Advocates argue that there … Read more

SEC Commissioner Lee Addresses Climate, ESG, and Boards of Directors

“You Cannot Direct the Wind, But You Can Adjust Your Sails”[1]

Good morning and thank you for the invitation to speak today at the Society for Corporate Governance 2021 National Conference.  I’m impressed with your full and informative agenda over the next few days, and I appreciate the important work you do in supporting company boards and executives.

I also appreciate your engagement in the SEC’s policymaking process, including your recent letter in response to the request for public input on climate change disclosures. In fact, we’ve received thousands of comments in response to that request, but we hardly

Read more

The Importance of Context for Numbers in Earnings Conference Calls

Numbers generally convey a sense of certainty – especially in accounting and finance. However, this perceived precision also makes it easier to use them in misleading ways. An extensive literature in political science and mass communications discusses how numbers, taken out of context, can bolster weak arguments. For instance, mortality rates are often cited to argue for certain foreign and public policies because they elicit strong feelings. However, mortality rates are complex estimates with large margins of error.

In financial disclosure, firms can use numbers to mislead and create a false impression of a firm’s outlook – potentially to the … Read more

Wachtell Lipton Discusses Key Corporate Governance Issues for Mid-Year 2021

Last year, we did a mid-year edition of our annual Thoughts for Boards of Directors to highlight key issues and considerations in managing the challenging business environment and profound upheaval caused by the pandemic.  Many of these issues are still top-of-mind as the “new normal” continues to evolve, and will continue to be prominent themes in boardroom discussions. As we emerge from the pandemic, boards and management teams should continue to assess their corporate purpose, strategy, risk management procedures, and board committee structures to optimize their ability to deal with the ever-proliferating number and complexity of business risks and opportunities … Read more

The Fiduciary Principle and the Best Interests of Average Retail Investors 

The Securities and Exchange Commission recently offered a full-throated explication of its premise that investment advisers are subject to a federally imposed fiduciary standard under the Investment Advisers Act (IAA).[1]   The premise, grounded in cryptic Supreme Court dicta, served as a basis for some to advocate that broker-dealers should be subject to a similar standard in providing personalized securities recommendations to retail investors.  This concept gained statutory traction in the Dodd-Frank Act, but was never codified.  After a long and tortuous path, however, the SEC finally adopted a compromise two years ago in lieu of mandating a strict fiduciary … Read more

Improving the SEC’s Best Execution Rule

The nature of Best Execution responsibilities of market participants has been surprisingly complex in light of the evolution of trading technology and our regulatory system. My remarks highlight several facets: the NBBO, Regulation NMS and the trade-through rule, fees and rebates in trading and make-take pricing, rebate pricing tiers, proprietary data and pricing power by the exchanges, latency, and the geography of trading and post-trade opacity. These raise a variety of questions about the meaning of Best Execution. Perhaps the ambiguity in meaning reflects the Securities and Exchange Commission’s (SEC’s) desire to allow Best Execution responsibilities to evolve organically, along … Read more

Arnold & Porter Discusses Congressional Antitrust Reform Targeting Big Tech

Senior congressional antitrust leaders on both sides of the Capitol are taking steps to transition a long-running investigation into competition practices in the technology sector into legislative action. Activity kicked off on Friday, June 11, when the House Judiciary Committee’s top antitrust leaders introduced legislation responsive to the Committee’s final report and recommendations from the “Investigation In Digital Markets,” which the Committee formally adopted in a party-line vote on April 13. Following introduction, however, it became clear that House activity is not taking place in a vacuum. Senator Amy Klobuchar (D-MN), who chairs the Judiciary Committee’s Antitrust Subcommittee, revealed on … Read more

Mergers, Antitrust, and the Interplay of Entrepreneurial Activity and the Investments That Fund It

Antitrust is in the news to an extent that it has not been for a generation. Senator Klobuchar (CALERA), senators Lee and Grassley (TEAMS Act), and, in a series of bi-partisan bills, various members of the House of Representatives all seek to rewrite antitrust law.  In particular, these bills aim to limit merger activity that is focused on acquisitions of smaller companies by larger technology companies, with the proposals ranging from presumptions of anticompetitive effects to outright prohibitions.

In a new working paper, we focus on the often overlooked implications of a change in antitrust law for venture capital, start-ups, … Read more

SEC Commissioner Asks Whether Agency Can Make Sustainable ESG Rules

Thank you Gary [LaBranche] and the National Investor Relations Institute for inviting me to speak at your 2021 Virtual Conference. Of course, I will clarify up front that the views I express are my own and do not necessarily reflect those of the Commission.

I. Introduction

I appreciate the unique and important role Investor Relations (“IR”) teams play in our capital markets, serving as a primary channel for communication between companies’ leaders and groups such as analysts, as well as asset managers and investors who hold ownership positions in those companies. It seems that an increasing amount of that communication

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Stock Market Value and Deal Value in Appraisal Proceedings

In a new article, I consider two methods of valuing public companies in appraisal proceedings under Section 262 of the Delaware General Corporation Law: the unaffected market price of the company’s shares and the deal price (less synergies, as applicable) that the acquirer pays in the merger.

Following their decisions in the DFC, Dell, and Aruba cases, the Delaware courts have strongly favored market-based methods of valuation in appraisal proceedings, and they have used both the unaffected market price and the deal price in appropriate cases. To be sure, each of these methods is reliable only when certain assumptions … Read more

Paul Weiss Discusses SEC Move to Consider ESG Disclosures

The SEC recently closed its period of public comment on the topic of climate-change disclosures after receiving hundreds of submissions. The comments, not surprisingly, reflected a range of views regarding climate-related disclosures, including whether the SEC should or must limit itself to requiring only financially material. These comments are the latest in an ongoing discussion among SEC Commissioners and staff, lawmakers, public companies and investors about the propriety, drawbacks and potential scope of SEC rulemaking mandating climate-related information. And they come about as SEC Chair Gary Gensler begins implementing his rulemaking agenda, with the new chairman changing the leadership of … Read more

The SEC’s Regulation of ESG Disclosures

The U.S. Securities and Exchange Commission has indicated that ESG disclosure regulation will be a central focus of recently confirmed SEC Chair Gary Gensler’s tenure. At the top of the agenda is climate change disclosure, and the Commission is taking steps toward broader reform. Then-Acting Chair Allison Herren Lee announced in March that the SEC will be “working toward a comprehensive ESG disclosure framework” and pursuing initiatives such as “offering guidance on human capital disclosure to encourage the reporting of specific metrics like workforce diversity, and considering more specific guidance or rule making on board diversity.” Acting Chair Lee also … Read more

ISS Discusses How ESG Investing Stands Up to the Critics

There is a quote that is commonly misattributed to Mahatma Gandhi: “First they ignore you, then they laugh at you, then they fight you, then you win.”

At the regular get-togethers in the responsible investment industry, war stories are frequently exchanged about the amused responses to environmental, social and governance (ESG)-related pitches; the confusion; the doors shut in faces. There are plenty of examples of the first two stages of the process.

It should be heartening therefore for the responsible investment industry to discover that it has matured to the extent that some of its more common shared understandings are … Read more

ESG and the Pricing of IPOs: Does Sustainability Matter?

In recent years, investors and others in the financial community have devoted increasing attention to the role of sustainability in financial markets and the economy at large. Sustainability is now seen as an alternative form of risk management, a way to create and preserve non-monetary value for future generations, and an area in which markets and clients expect financial institutions and corporations to take significant action. With research showing that investors consider sustainability and ESG ratings in their investment decisions, accounting and investor-relations professionals are including ESG reporting and related strategies in their financial communications, including in analyses of initial … Read more

Are Earnings Announcements More Useful than Other News for IPO Pricing?

We study the relative usefulness of earnings announcements for valuation from the perspective of information externalities: the use of industry peer information for valuation, particularly for IPO pricing. Externalities of accounting information are one of the primary justifications for disclosure regulations. Assessment of the usefulness of earnings announcements is therefore incomplete without understanding how such information is used for peer equity valuation.

It is not obvious that earnings announcements or other information should matter more for peer share valuation. Prior research suggests that accounting information is by nature low frequency, not discretionary, and primarily backward-looking. Other information, in contrast, is … Read more

SEC Commissioners Comment on Chair Gensler’s Regulatory Agenda

Last Friday, the Office of Information and Regulatory Affairs released the Spring 2021 Unified Agenda of Regulatory and Deregulatory Action (“Agenda”), which includes the SEC Chair’s Agenda.[1] While there are important and timely items on the list, including rules related to transfer agents and government securities alternative trading systems, the Agenda is missing some other important rulemakings, including rules to provide clarity for digital assets, allow companies to compensate gig workers with equity, and revisit proxy plumbing. Perhaps the absence of these rules is attributable to the regrettable decision to spend our scarce resources to undo a number of

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Is the Quality of Law in the Eye of the Beholder?

Millions of dollars are spent every year by international financial institutions and development agencies to promote legal reforms in countries around the world. Indeed, since the late 1990s, legal reforms have become a key tool for trying to promote financial and economic growth. With the adoption of the UN’s Sustainable Development Goals (SDGs) in 2016, the pursuit of the rule of law and “good law” has become not just a tool for development, but a goal in itself. Indeed, the rule of law is enshrined in SDG 16.

Despite the strong belief in the importance of establishing good … Read more

Cleary Gottlieb Discusses New York’s New Antitrust Law

The New York state Senate has passed the “Twenty-First Century Antitrust Act” (S. 933) to amend its state antitrust law, radically changing the risks of doing business in New York. It ostensibly aims at so-called “Big Tech,” but applies to all businesses, even those having very little contact with New York. If enacted by the Assembly and signed into law by the Governor, the bill would have three primary implications:

  1. The bill requires merger filings in New York 60 days before closing for a huge number of relatively small deals with little connection to New York—covering many more deals than

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The Psychology of Taxing Capital Income

Facebook CEO Mark Zuckerberg’s wealth has increased by over $100 billion since 2004, but he has paid relatively little income tax. Why? Because of the “realization rule:” Zuckerberg has not sold—and thus “realized” the gains on—the great majority of his Facebook shares, so he’s not taxed.  The realization rule creates a host of problems, including huge revenue losses and inefficient investment incentives.  Indeed, the Senate Finance Committee Chair plans to introduce a bill to repeal the rule for liquid assets for rich taxpayers. In a new article, we explore public attitudes toward taxing unsold gains and find the … Read more

Arnold & Porter Discusses Delaware Case on SPACs and Breaches of Fiduciary Duties

The complaint filed in Franchi v. Multiplan Corp. et al. in the Chancery Court of Delaware on April 9, 2021 [1], has received a fair amount of attention because it claims breaches of fiduciary duties of a SPAC’s Board of Directors and officers with respect to a de-SPAC transaction, requiring entire fairness judicial review, and because it essentially alleges that, as a general matter, conflicts of interest and flawed processes in approving mergers with targets is endemic to the nature of SPACs. Given the prevalence of SPACs and the recent SEC statement regarding the risks of conflicts of interest in … Read more

Creating Controversy in Proxy Voting Advice

Proxy advisory firms have emerged as major players in corporate governance by helping to address the public goods aspects of information production in corporate governance. These firms provide both a) recommendations on how to cast proxy votes and b) research reports that contain the full rationale for their recommendations, including detailed information on the operating firm’s governance. While proxy advisers’ research reports are only available to their subscribing shareholders, their recommendations are often made public in the media. Through both these public recommendations and private research reports, proxy advisers, such as ISS, have a substantial impact on voting outcomes.… Read more

SEC Chair Speaks at Meeting of Investor Advisory Committee

Good morning. Thank you Jennifer, Heidi, and all the committee members for having me. I enjoyed meeting with members of the Executive Committee yesterday and am thrilled to meet the whole committee for the first time. I’m grateful for the members’ time and willingness to represent the interests of American investors.

I know this committee has weighed in on a variety of policies that are of great importance to the agency and to the investing public. Every day, I’m motivated by working families and how they’re served by the agency’s mission.

At the heart of our mission and our work

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Are Companies More Likely to Go Public If Their Competitors Do?

The determinants of when and why private companies decide to go public through an initial public offering (IPO) is an important question with many policy implications. Anecdotally, one reason why firms decide to do an IPO is as a response to the actions of their rivals. For example, in the share-economy sector, Uber is said to have sped up its IPO plans after learning that Lyft would soon go public. In the cyber-security industry, Tenable reportedly sped up its IPO plans after hearing about the IPO of one of its close competitors, Zscaler. These sorts of “peer effects” among firms—where … Read more

Skadden Discusses Blowing the Whistle Under EU Law

On October 23, 2019, the European Parliament and the European Council adopted the Whistleblower Protection Directive (Directive) to set a minimum standard for the protections EU member states must provide to whistleblowers.

For the first time, whistleblowers are protected under EU law, but implementation at the member state level has been slow. While 19 of the 27 member states had prepared draft legislation by the one-year anniversary of the Directive coming into force, no member state has implemented the new regime at a national level. A report by Transparency International in March 2021 ranked only the Czech Republic as having … Read more

Does Firm-Specific Knowledge Matter for New Audit Committee Chairs and Financial Reporting Quality?

Overcoming the learning curve for a new situation or role at work can be difficult, especially when the situation or role requires specialized knowledge. Newly appointed audit committee chairs face a particularly steep learning curve, given that audit committees of publicly traded corporations are responsible for monitoring management’s financial reporting decisions. Doing the job effectively requires understanding the company’s culture, risks, internal controls, activities, and policies. It also requires coordinating the activities of the audit committee and obtaining information about important company decisions and practices from members of the senior management team, internal auditors, and external auditors. Corporate governance experts … Read more

SEC Chair Talks Finance and Technology in Equity Markets

Thank you, Rich, for that kind introduction and for inviting me here today. As is customary, I’d like to note that my views are my own, and I am not speaking on behalf of my fellow Commissioners or the staff.

Since I was last with you at these conferences, Rich, I’ve been honored to hold a number of roles. Most recently I spent three and a half years at MIT, where my research and teaching centered on the intersection of finance and technology.

One thing that I’ve come to believe is that technology and finance have coexisted in a symbiotic

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Acquisition Flippers and Earnings Management

Mergers and acquisitions are considered an integral part of a well-functioning governance system, an effective device for transferring corporate control to more capable owners and executives who can manage firm assets more efficiently and create economic value for shareholders of target firms. Acquirers, meanwhile, aim to reap financial synergies by integrating their economic resources and operations with those of targets. All this takes time, though, which is why mergers are often considered long-term corporate investments. Nonetheless, in about $3.5 trillion worth of deals, representing  23 percent of U.S. M&A activity from 1980 to 2015, targets were resold.[1] This phenomenon … Read more

Davis Polk Discusses New Standard Contractual Clauses for Moving Personal Data Outside the EU

On June 4, 2021, the European Commission (“EC”) released a final working draft, along with its implementing decision, for a new set of Standard Contractual Clauses (“New SCCs”) for the transfer of personal data to countries outside of the European Economic Area (“EEA”) whose laws the EC has determined do not provide an adequate level of data protection.  In this memo we highlight three key developments that contracting parties should be aware of with regard to the New SCCs: (i) the timing for implementation, (ii) the new modular approach and additional use cases covered, … Read more

The Corporate Objective and Contemporary Shareholders: Is It Time for “Strategic” Corporate Governance?

The long-standing debate about corporate purpose has stirred multiple thought-provoking articles across various disciplines. Should companies embrace shareholder value maximization or deal with the fuzziness of the goals of multiple constituencies? Instead of contributing to either side of the shareholders versus stakeholders debate, in our forthcoming article in the Journal of Management Studies, we  critically assess the challenges that contemporary shareholder practices pose for corporate governance and highlight the need for strategic corporate governance, or governance policies and practices that make a priority of the sustainable competitive advantage of the firm.

We focus on three critical assumptions about maximizing … Read more

ISS Discusses Liquidity Behavior in the S&P 500

As a large cap index all the constituents of the S&P 500 are highly liquid. This is certainly true compared to mid-cap or small cap stocks. There are, though, high, and low rent districts within the S&P and the most liquidity is concentrated in a few stocks with the largest market capitalizations. We treat large-cap stocks differently than mid-caps when thinking about trading strategies largely because of their different liquidity profiles. Should we consider making similar distinctions within the S&P 500 itself?  Understanding variations in the liquidity characteristics of different S&P 500 stocks can help determine the optimal participation rate … Read more

Administrative Crimes: A Qualified Defense

On his way out, President Trump sought to “protect Americans from overcriminalization” by trying to limit the criminal enforcement of regulatory offenses. Hostility to administrative crimes is growing at the Supreme Court too, in part as an outgrowth of concern about the administrative state generally, but also because the very notion that someone can be prosecuted for an offense defined by an agency and not Congress seems abhorrent to Justice Gorsuch and others. Such prosecutions regularly occur, however, not just for the SEC Rule 10b-5 violations most familiar to readers, but for hoarding personal protective equipment during the COVID-19 pandemic, … Read more

Putting the Electric Cart Before the Horse:* Inevitable Costs of a New ESG Disclosure Regime

Thank you to Dan [Bigman] and the Corporate Board Member for inviting me to participate in today’s ESG Board Forum.  Of course, the views I express here are my own and do not necessarily represent those of my fellow Commissioners.

As the topic of this event indicates, ESG is on everyone’s mind this year.  There have been several calls for the SEC to require public issuers to include granular disclosure on ESG topics in their SEC filings.  As you have probably heard me say before,[1] I have reservations about the SEC issuing prescriptive, line-item disclosure requirements in this space,

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Aggressive Boards and CEO Turnover

A common dilemma for people who seek advice is that good advice sometimes comes at the cost of revealing negative information about the persons seeking it. In the world of corporate decision making, a CEO who seeks the counsel of the board of directors due to a problem with, for example, a project, is also implicitly conveying that the problem arose under her stewardship. The CEO thus faces the following predicament: She can accurately communicate the problem to the board and therefore get the board’s expert advice on how to proceed, or the CEO can mislead the board by, say, … Read more

How Corporate Governance Codetermination Works in Practice

Codetermination is a system of shared corporate governance between workers and shareholders. While such a system has long been a staple of the European business world, it has been generally ignored by U.S. corporate governance scholars. When it has made an appearance, it has largely served as a foil for shareholder primacy and an example of corporate deviance.

Over the last 15 years, however, an expanding body of empirical research on codetermination has shown surprisingly positive results about the system’s efficiency, resilience, and benefits to stakeholders. Rather than experiencing the failures predicted by the law-and-economics view of shareholder primacy, codetermination … Read more

SEC Commissioners Respond to Chairman’s Call for Review of Proxy-Voting Advice Rules

Today [June 1], Chair Gensler announced that he has directed the SEC staff to consider whether to recommend that the Commission revisit its recent regulatory actions taken with respect to proxy voting advice businesses and its longstanding interpretation of proxy solicitation.[1] Additionally, the staff announced that it will not recommend an enforcement action against a proxy voting advice business that fails to comply with the Commission’s existing requirements for proxy voting advice.[2]

As background, last July, the Commission adopted requirements that proxy voting advice businesses, in order to rely on exemptions from the information and filing requirements of

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Law Enforcement’s Lochner

When we contemplate the numerous challenges regulators and prosecutors face in identifying and redressing corporate and white-collar crime, constitutional criminal procedure is not usually high on the list. If anything, the constitutional doctrines that apply to the government’s interactions with corporations are decidedly pro-government; with few exceptions, they promote easy access to corporate information.

The aim of my latest article, Law Enforcement’s Lochner, is to explain why and how this ease of access may come under pressure. As I explain in the article, two distinct trends in constitutional jurisprudence threaten to undermine the government’s investigative powers: the U.S. Supreme … Read more

Cleary Gottlieb Discusses EC’s Corporate Sustainability Reporting Directive

On April 21, 2021, the European Commission published an ambitious new package of “sustainable finance” regulation proposals. By far the most awaited element of this release concerned the Commission’s proposal for the review of the Non-Financial Reporting Directive (“NFRD”) – soon to become the Corporate Sustainability Reporting Directive (“CSRD”).

Under the NFRD, large “public-interest” entities (that is: large listed companies, large credit and insurance institutions, and other entities designated as such by Member States) are currently required to report certain non-financial information as part of their annual management report, largely on a comply-or-explain basis.

The CSRD … Read more

Common Ownership and the Decline of the American Worker

American workers are more productive than ever, but they take home the same pay they did 40 years ago.  While firms have enjoyed blockbuster profits—and the U.S. gross domestic product has tripled—most American households have not shared in this increasing prosperity. As wages have stagnated, income inequality has skyrocketed. Causes like de-unionization, globalization, immigration, labor market concentration, and technology have been blamed for these trends. But an additional culprit has escaped detection: common ownership—a few powerful institutional investors controlling large stakes in most U.S. corporations. In a new article, we explain how the shift to common ownership has been … Read more

ISS Offers a COVID-19 Update: Investor Related Class Actions

In March 2020, as the Coronavirus pandemic started to spread across the U.S. and wreak volatility in the stock market, securities class action complaints started to follow. Not surprisingly, U.S.-based litigation often follows wild stock market fluctuations as investors look to recover lost assets.

The very first COVID-19 related class action was filed on March 12, 2020 in USDC Florida (Southern) against Norwegian Cruise Line Holdings. Shareholders alleged the Miami-based company with deceptive sales tactics and misleading updates to the investor community related to its business and operations.

Since the Norwegian complaint was filed, in the last 14 months, ISS … Read more

Sullivan & Cromwell Discusses Delaware Chancery’s Rejection of MAE Claim for Covid Effects

On April 30, 2021, then Vice Chancellor (now Chancellor) Kathaleen McCormick of the Delaware Court of Chancery issued a post-trial decision in Snow Phipps Group, LLC v. KCAKE Acquisition, Inc.[1] ordering specific performance of a private equity purchaser’s obligation to purchase a business.  The Court rejected the buyer’s argument that COVID-19 was reasonably expected to cause a sales decline that would mature into a material adverse effect (“MAE”), noting that, although the company sustained a precipitous drop in sales at the outset of the COVID-19 pandemic, it rebounded in the two weeks prior to termination and was not projected … Read more

SEC Commissioner Crenshaw Speaks at Small Business Forum

Good afternoon! Thank you Martha [Miller] for the warm introduction. It is wonderful to be here. I have truly enjoyed hearing from all of the panelists over the last several days. And I am particularly interested in today’s discussion focused on smaller public companies.

You may not know this about me, but I am the proud sister of an entrepreneur. My brother started his own business before the pandemic – and he is everything from the chief executive and chief financial officer to the IT and customer service departments to the expert on intellectual property issues. I know how challenging

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Keeping Up with the Joneses and the Real Effects of S&P 500 Inclusion

The S&P 500 index is the most visible and prestigious broad-based stock index in the U.S. Being included in it means joining an exclusive club that confers prestige on its members, as, for instance, many articles noted when Tesla was included in the index. If there is a “keeping up with the Joneses” effect for corporations, we would expect them to change their policies to fit with their peers once they joined the club. This effect has been studied for individuals but not for corporations, and S&P 500 inclusion offers a good opportunity to do so.

Joining the S&P 500 … Read more

The History and Revival of the Corporate Purpose Clause

The corporate purpose debate is experiencing a renaissance. The contours of the modern debate are relatively well developed and typically focus on whether corporations should pursue shareholder value maximization or broader social aims. A related subject that has received much less scholarly attention, however, is the formal legal mechanism by which a corporation expresses its purpose—the purpose clause of the corporate charter.

This clause, or set of provisions, is the formal legal mechanism by which a corporation expresses its purpose in its highest constitutive document that is filed with the state. As corporations often take advantage of broad enabling statutes … Read more

SEC Commissioner Lee Speaks on Myths and Misconceptions about “Materiality”

Thank you, Neil [Stewart] for the introduction and for having me today as you discuss the important and timely topic of climate and ESG disclosures. I very much look forward to hearing from Janine [Guillot] and Julie [Bell Lindsay]. You both bring years of experience and significant expertise to these issues, and your organizations, SASB and CAQ, have contributed significantly to the development and understanding of ESG disclosure and assurance related to such disclosures.

This is a highly sophisticated audience of accountants, auditors, attorneys, and other professionals, with deep knowledge concerning public company accounting and other disclosures – how to

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Congress and the Insider Trading Prohibition Act: “Can’t Anybody Here Play This Game?”*

Last week, the House of Representatives passed the “Insider Trading Prohibition Act” (“ITPA”).[1] Proponents are hailing it as a triumph of bipartisan cooperation. Conversely, critics are calling it the “Insider Trading Protection Act.” This is because the bill codifies in statutory law the “personal benefit” requirement under which the tippee can only be convicted if that person paid or promised some benefit (tangible or even intangible and reputational) to the tipper. That requirement had resulted in many convictions being overturned (and even more prosecutions probably not being commenced in the first place). In the Second Circuit, this doctrine had … Read more

Paul Weiss Discusses SEC Approval of Nasdaq Rule Change Allowing Direct Listings

On May 19, 2021, the SEC approved Nasdaq’s proposed rule change[1] to permit primary direct floor listings. This will permit companies to undertake an initial public offering and concurrent Nasdaq listing without the use of underwriters to market the shares (a “Direct Listing with a Capital Raise”). Prior to the rule change, direct listings were available only for secondary offerings by existing shareholders. The rule change allows for primary direct listings to occur alone or together with a secondary direct listing. Primary direct floor listings have been permitted on the NYSE since December 2020.

We summarize below Nasdaq’s rule … Read more

Corporate Purpose and Acquisitions

Acquisitions are at the core of corporate strategy, enabling companies to expand and reposition themselves in the market. In 2019 alone, they accounted for nearly $3.7 trillion of economic activity. Yet acquirers famously struggle to realize value from these transactions. In a new study, we find that this challenge may be explained, at least in part, by the difficulty in maintaining a clear and compelling corporate purpose in the aftermath of the deal.

Purpose can loosely be understood as the “why” behind an organization’s existence. A recent survey of nearly 500 executives by Harvard Business Review Analytics Services revealed that … Read more

SEC Commissioner Lee Speaks on Leveraging Regulatory Cooperation

Good afternoon. It’s a privilege to welcome you all to the annual Section 19(d) Conference. I want to start by commending NASAA and SEC staff for their work in putting this event together. And thanks to our colleagues from NASAA and FINRA for joining us and for being steadfast partners in our shared investor protection work. Our organizations work closely together throughout the year, but this conference represents an important opportunity for us to reflect on the policy and regulatory concerns that we share, and to deepen our cooperative partnership.

The issues on the agenda today are all critically important

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Corporate Venture Capital, Disclosure, and Financial Reporting

In a new paper, we examine firms’ corporate venture capital (CVC) investing from a disclosure and financial reporting perspective. CVC refers to minority equity investments made by established, publicly-listed firms in privately-held entrepreneurial ventures. CVC investing differs from pure venture capital investing in that strategic gains rather than financial returns are the primary consideration. The investing firm gets access to new sources of innovation and potential acquisition targets, and the startup venture benefits from the established firm’s capital, expertise, and connections. While established firms in the technology, industrial, and healthcare sectors such as Google, General Electric, and Johnson & Johnson … Read more

SEC Chair Gensler Speaks at FINRA Annual Conference

Good afternoon. I want to thank the Financial Industry Regulatory Authority and Robert [Cook] for hosting me as part of this week’s conference.[1] I’ve known Robert since he joined the SEC to lead the Trading and Markets Division and I was at the CFTC, when we first worked together on what was called the “Flash Crash” in May of 2010.

As a self-regulatory agency, FINRA plays a role in protecting investors — writing and enforcing rules for registered brokers and broker-dealers, examining firms, educating investors, and more. I look forward to working with the whole team and Robert on

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Mitigating Gig and Remote Worker Misconduct

Jobs in which workers are physically distant from their employers are increasingly prevalent, due to both a surge in the gig economy and the widespread increase in remote work, which was on the rise even before the pandemic. This development has created unique employee-governance challenges.

Our forthcoming article, “Mitigating Gig and Remote Worker Misconduct: Evidence from a Real Effort Experiment” posits that employee misconduct will likely be prevalent in gig and remote work settings because the physical separation between employers and workers exacerbates the “principal-agent” problem in two important ways. First, gig and remote workers are likely to feel less … Read more

SPAC vs. IPO: Is There a Difference in Executive Compensation?

An emerging company in need of capital to grow has an important decision to make: how and when to raise the necessary capital.

The traditional way of taking an emerging company public in an initial public offering, or IPO, is being displaced by a new method involving a SPAC, or special purpose acquisition company. A SPAC is a “blank check” shell corporation “created specifically to pool funds in order to finance a merger or acquisition opportunity within a set timeframe,” according to the Securities and Exchange Commission. “The opportunity usually has yet to be identified”.

The SPAC is typically led … Read more

Is Everything Securities Fraud?

Securities litigation is almost inevitable for any public company.  Often, investors sue because the firm’s managers engaged in fraud that directly harmed the shareholders – say, by doctoring the firm’s financials or lying about known business prospects.  However, shareholders also sue their companies when those companies engage in conduct that more directly harms a different set of constituents.  When a pharmaceutical company sells dangerously contaminated drugs, a faulty car battery bursts into flames, or an oil rig explodes, it’s difficult to say that the direct victims of the misconduct are the companies’ shareholders.  Yet shareholders commonly base lawsuits under the … Read more

Cahill Gordon Discusses SEC Rules Under Holding Foreign Companies Accountable Act

The Securities and Exchange Commission (the “SEC”) has adopted interim final rules[1] to implement the Congressionally-mandated document submision and disclosure requirements of the Holding Foreign Companies Accountable Act (the “HFCA Act”), which became effective on May 5, 2021.

The HFCA Act was enacted to address certain concerns over registrants listed on U.S. securities exchanges whose audit reports are issued by registered public accounting firms with offices in foreign locations in which local authorities may prohibit complete inspection by the Public Company Accounting Oversight Board (the “PCAOB”).  In particular, the HFCA Act is concerned with influence by Chinese authorities over … Read more

Venezuela: Prospects for Restructuring Sovereign Debt and Rebuilding a National Economy

Venezuela is facing not only a grave humanitarian crisis, but an acute financial and economic one as well–including a massive debt burden.  Moreover, Venezuela is in the throes of an extended political stalemate between the forces aligned with the regime of Nicolás Maduro and those led by opposition leader and so-called “interim” Venezuelan president Juan Guaidó.  However, as long as the Maduro regime remains in power, it seems unlikely that Venezuela will be able to negotiate a restructuring deal with its foreign creditors, due in no small part to certain restrictions provided for in the current U.S. sanctions regime vis-à-vis … Read more

ISS Revisits the Performance of ESG Screened Indexes During the Pandemic

Nearly a year ago, we analyzed the outperformance of ESG strategies during the initial stage of the COVID-19 Pandemic. As of May 2020, we found that ESG indexes based on ISS ESG data had outperformed by 1.3% to 2.8%, with lower volatility than their benchmark over the first five months of 2020. In this article we revisit those findings to examine whether the ESG outperformance has held up as global stock markets have strongly recovered.

We focus here on the Solactive ISS ESG Screened Series, an index family which integrates ISS ESG’s most frequently requested ESG filters including:

  • a

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Investor Relations, Activism, and Engagement

Activist investors once limited their targets to mostly smaller, less known firms. Now, though, they increasingly target large, household names like Procter & Gamble, DuPont, and Berkshire Hathaway, aiming to influence company actions, replace management, or even purchase the company.

This increase in activism has been facilitated by changes that increase activist shareholders’ ability to exert influence and shape the views of other shareholders.[1] The resulting struggle between managers and activists to influence shareholder opinion about the firm has led to calls for more engagement between managers and investors. For example, in a letter to CEOs, BlackRock CEO … Read more

Mind the (Data) Gaps: SEC Commissioner Speaks at Conference on Financial Market Regulation

Before I begin my remarks, I need to mention that the views that I express today are my own and do not necessarily reflect the views of the Commission or its staff.

To start, I want to note that I am thankful for the work that economists do inside and outside the SEC to help us understand the markets we regulate. It’s vital in terms of providing insight and analysis to help shape our regulatory approach. As those of you who have spoken to me may have noticed, I am not an economist. But I do have an economist’s love

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COVID-19 Isolation, Managerial Sentiment, and Corporate Policies

Global efforts to limit the spread of Covid-19 have prompted the widespread adoption of restrictions on people’s ability to go out and about and, as result, have thrust public mental health issues into the spotlight.  Mandatory work-from-home arrangements, for example, have created emotional distress for many homebound employees working alone. The U.S. Census Bureau’s December 2020 Household Pulse Survey found that 42 percent of respondents reported symptoms of anxiety or depression, an 11 percent increase over the previous year’s results. The American Psychological Association found that nearly eight in 10 adults claimed that the pandemic is a significant source of … Read more

The Real Merger Gains: Correcting for Partial Anticipation

Previous takeover studies document a puzzlingly skewed division of gains between target and acquirer firms. The targets gain a hefty bid premium, while acquirers’ returns are insignificant or slightly negative around bid announcement dates. Thus, the question arises, Why do acquirer managers undertake low-benefit or even value-destroying mergers? In a new paper, I reassess the notion that acquirers aim to create synergies and maximize value through mergers and acquisitions (M&A).

Prior studies typically assume that mergers are unpredictable during the pre-offer period. However, a growing literature documents that private information from merger negotiations leaks to the market, suggesting that some … Read more

Skadden Discusses SEC and ESG Disclosure

During his Senate confirmation hearing for chair of the Securities and Exchange Commission (SEC), Gary Gensler said he would adhere to the U.S. Supreme Court’s view of materiality: Information is material (and should therefore be disclosed) if there is a substantial likelihood that a reasonable investor would consider the information important in making an investment or voting decision. He then noted that many shareholders are calling for disclosures on climate risk, human capital and political spending, suggesting that they may be material.

Since the start of the Biden administration, then-Acting Chair Allison Herren Lee and the SEC staff have clearly … Read more

Who Will Regulate Central Bank Digital Currencies?

Though a bit provocative, this headline raises a liminal question on the various projects of Central Bank Digital Currencies (CBDBs): Which  governance will apply to them? Or as Juvenal, the poet in ancient Rome, famously asked, “Who will guard the guards themselves?”[1]

What Is a Central Bank Digital Currency?

A CBDC is the digital form of a country’s fiat currency and, like traditional currency, represents a claim on that country’s government. Instead of printing money, the central bank issues electronic coins backed by the full faith and credit of the government.[2] As a result, for the first time, … Read more

Davis Polk Discusses Who Can Have a Federal Reserve Master Account

The proposed guidelines that the Board of Governors of the Federal Reserve System (the Board) recently issued for public notice and comment mark the latest development on one of the most important policy questions for the U.S. financial system today: who is entitled to have a master account?  Having an account at one of the twelve Federal Reserve Banks (a master account) is necessary for an institution to have direct access to the Federal Reserve’s payment systems and to settle transactions with other participants in central bank money.[1]  “With technology driving rapid change in the payments landscape,” … Read more

The Efficacy of PCAOB Operational Decision Making

The operating budget of the Public Company Accounting Oversight Board (PCAOB) has grown significantly since the regulator’s inception, with the total annual resources consumed by the PCAOB almost doubling—from $127 million to $252 million—between 2006 and 2018 (PCAOB 2007, 2019). However, because all auditors of U.S. public companies have been subject to PCAOB oversight since the initiation of the regulator’s inspection program in 2003-2004, academic research has thus far offered little insight into whether the PCAOB’s budget growth and its related post-implementation operating decisions have improved the reliability of U.S. audits.

In a new study (available here), we attempt … Read more

Sullivan & Cromwell Discusses New York Legislation on End of U.S. Dollar LIBOR

On April 6, 2021, the State of New York adopted long-anticipated legislation addressing the cessation of  U.S. Dollar LIBOR (“LIBOR”).  The legislation provides a statutory approach to so-called “tough legacy” contracts (contracts that (1) reference LIBOR as a benchmark interest rate but do not include effective fallback provisions in the event LIBOR is no longer published or is no longer representative, and that (2), in the case of overnight, 1-month, 3-month, 6-month and 12-month LIBOR, will remain in existence beyond June 30, 2023, or, in the case of the 1-week and 2-month LIBOR, will remain in existence beyond December 31, … Read more

Private Ordering in Social Enterprise: New Corporate Structures for Mission Commitment

Just over 10 years ago, benefit corporations emerged as legal entities intended to permit for-profit social enterprises to pursue public-interest missions. While increasingly popular among states and businesses, these new entities have received unending criticism from commentators on all sides. To some, benefit corporations are unnecessary, because traditional corporations already can and do pursue social missions. To others, they are insufficient, because benefit corporation directors must merely consider those missions but need not prioritize them.

In the latter camp, many legal scholars have proposed legislation to improve benefit corporations or to create new types of entities to better accommodate social Read more

Skadden Discusses Antitrust Enforcement in Biden Administration

President Biden has signaled a pro-enforcement approach to antitrust policy by naming Columbia Law School professor Tim Wu as a White House adviser and nominating Lina Khan, who also teaches at Columbia Law, to be commissioner of the Federal Trade Commission (FTC). Both are known for expansive views of the antitrust laws and advocacy of forceful enforcement, particularly against technology companies. The president has not yet announced nominees for the most critical antitrust enforcement positions — assistant attorney general for antitrust or FTC chairman — and may choose centrists or more progressives. Regardless, the president’s choices of Mr. Wu and … Read more

How Open Banking May Affect the Legality of Screen Scraping

Screen scraping – the technique of automatically collecting, parsing, and organizing data from the web – has over the past two decades been used for everything from targeted advertising to price aggregation to academic research. It can, however, be detrimental to the data host and consumer. Scraping is parasitic when it undercuts a website’s revenue by republishing data without requiring users to view supporting advertisements. It can also facilitate copyright infringement or overload the data host’s servers. What’s more, screen scraping can raise privacy concerns for consumers if it collects identifiable information or enables new forms of surveillance. In the … Read more

Sullivan & Cromwell Discusses Second Circuit Standard for Standing in Data Breach Actions

On April 26, 2021, the United States Court of Appeals for the Second Circuit issued a unanimous opinion in McMorris v. Carlos Lopez & Associates, LLC [1] affirming the dismissal, on Article III standing grounds, of a class action predicated on the plaintiffs’ alleged increased risk of identity theft or fraud arising out of their employer’s accidental email dissemination of their sensitive personal information to other employees within the company.  The Second Circuit held that, although plaintiffs may in some cases establish standing based on an increased risk of identity theft or fraud following the unauthorized disclosure of their data, … Read more

How Financial Misconduct by Institutional Investors Affects Corporate Social Responsibility

In recent years, institutional investors have publicly voiced their support for firms’ corporate social responsibility (CSR) activities. Most notably, Larry Fink, the CEO of BlackRock— the largest institutional investor in the world, with over $7 trillion in assets under management—sent a letter to the CEOs of investee firms and encouraged them to act in a more socially responsible manner and report such activities.[1] Acts like these raise questions about the role of institutional investors in shaping the socially responsible behavior of corporations in which they hold equity positions. Of course, not all institutions have the same (financial or social) … Read more

Skadden Discusses Closer Scrutiny of Corporate Conduct Under Biden

The Biden administration is widely expected to be tougher on corporate wrongdoing than its predecessor. Although there have not yet been significant changes to existing policies, key nominations to date and early enforcement initiatives signal close scrutiny of corporate conduct to come.

Personnel. Beyond those already confirmed to lead the Department of Justice (DOJ) and Securities and Exchange Commission (SEC), only a handful of senior leaders at these agencies are in place.

The Senate confirmed Merrick Garland as attorney general on March 10, 2021, followed by the confirmations of Lisa Monaco and Vanita Gupta as deputy attorney general and associate … Read more

Bankruptcy Shopping: Domestic Venue Races and Global Forum Wars

The United States Bankruptcy Code gives debtors wide discretion to reorganize in the venue of their choice. These lenient venue selection rules long have allowed bankruptcy courts in the District of Delaware and the Southern District of New York to dominate the market for large Chapter 11 cases, though recently the Southern District of Texas has also begun to attract a large number of cases.

Critics of liberal venue rules charge that bankruptcy districts are engaged in a “race to the bottom” as judges compete for blockbuster cases. Others counter that competition for cases improves efficiency and predictability as judges … Read more

WallStreetBets, GameStop, and the Rise of ESG Retail Investors

The GameStop and meme-stock trading frenzy are evidence of a potential revolution in corporate governance and signal the rise of Generation Y (“Millennials”) and Generation Z (“GenZ”) as retail investors. In a new article, we discuss how these investors, who we call wireless investors, could set in motion a social movement able to change the way shares are held and voted and, ultimately, redefine the purpose of public corporations. The social movement will start with wireless investors exercising their right to vote their shares and, by doing so, promoting their environmental, social, and governance (“ESG”) values. This will cause … Read more

Debevoise & Plimpton Discusses UK Global Anti-Corruption Sanctions Regime

On April 26, 2021, the United Kingdom implemented a new sanctions regime that allows the UK government to impose asset freezes on public officials and other persons involved in serious corruption. The regime replaces, and expands, the Misappropriation of State Funds sanctions regime that the United Kingdom implemented in January 2021. The restrictions have initially targeted 22 persons from Russia, South Africa, Guatemala, South Sudan and Honduras.

The sanctions regime gives the UK authorities an additional tool in their arsenal, which, along with legislation such as the UK Bribery Act 2010 (“UKBA”) and the Proceeds of Crime Act 2002 (“POCA”), … Read more

Debt, Control, and Collusion

The new wave of financial economics empirical scholarship has revitalized what had been theoretical discussions about the effects of common ownership in both economics and law.  Common ownership within the same industry by mutual funds may create incentives for those funds to maximize the returns of their portfolio through collusion rather than to maximize the value of any particular company within its portfolio.  An institutional investor that has stakes in firms A, B, and C, for example, enjoys a greater total profit from its entire portfolio if there is coordination across the firms and hence less competition.  A common owner … Read more

Investors Seek Answers on Sovereign Climate Performance

Global greenhouse gas (GHG) emissions decreased by 6.4% in 2020, largely due to the COVID-19 pandemic. While encouraging at first glance, many climate change experts have pointed out that this result will have hardly any long-term effect on curbing climate change.

The link between economic activity and emissions is hard to ignore. As was noted recently in Nature, China is a good example of this. Its emissions reduced significantly early in the year but then bounced back quickly when the COVID pandemic was brought under control. The same can be expected for global emissions in 2021. The International Energy … Read more

Contractual Stakeholderism

Individually or collectively, corporate leaders are promising stakeholders to improve corporate practices on a range of issues. In a new article, I argue that they can demonstrate their commitment to stakeholders by designing contracts differently.

We are already attentive to the ways that stakeholders are harmed by the contracts they enter into directly with corporations.  This awareness has raised concerns over contracting practices and bargaining power, information asymmetries, and informed consent.  In my article, I focus on contracts to which stakeholders are not parties, and how those contracts can nonetheless harm stakeholders as third parties.[1]  For example, contracts … Read more

“Public” Mutual Funds

The Big 3 mutual-fund managers (BlackRock, State Street, and Vanguard) have amassed incredibly large public-company holdings through the array of mutual funds they oversee.  As a result, they now play a pivotal role in corporate governance in many of the world’s largest and most important companies.

A key concern is whether the Big 3 use their powerful voice in corporate affairs to good effect.  Professors Lucien Bebchuk and Scott Hirst argue that they neglect their oversight obligations because of agency costs;[1] Professors Jill Fisch, Asaf Hammadi, and Steven Davidoff Solomon (“FHDS”) counter that the Big 3 have sufficient competitive … Read more

A Call for Reflection on Sustainable Corporate Governance

Together with other European Corporate Governance Institute (ECGI) research members, we have recently issued a Call for Reflection on Sustainable Corporate Governance to express our concerns over the risk that new legislation on EU companies’ governance is adopted without properly considering the concerns raised by many academics and interested parties during the consultations that have taken place so far. These concerns, as detailed below, focus on the three misconceptions in the approach of the European Commission and the Study on directors’ duties and sustainable corporate governance it has commissioned: (1) the conflation of two separate issues, namely corporations’ horizons and … Read more

The Contractarian Theory of the Corporation and the Paradox of Implied Terms

The contractarian theory of the corporation holds that a business corporation is a creature of contract and, more specifically, a nexus of incomplete contracts between directors, shareholders, employees, suppliers, customers, and other parties (see here). This draws attention to the express or implied consent of all the participants and suggests that the role of corporate law and the courts is to enable and support private ordering: Corporate law supplies the transaction-cost reducing standard-form terms the parties would have agreed to had they addressed them explicitly, and courts settle disagreements by filling the contractual gaps using the same hypothetical bargain … Read more

Sullivan & Cromwell Discusses Decision Curtailing FTC Ability to Obtain Monetary Relief

On April 22, a unanimous U.S. Supreme Court held in AMG Capital Management, LLC v. Federal Trade Commission[1] that Section 13(b) of the Federal Trade Commission Act does not give the Federal Trade Commission the authority to seek (or authorize a court to award) equitable monetary relief such as restitution or disgorgement.  In so holding, the Court relied principally on the plain text and structure of Section 13(b), as well as that provision’s place in the broader enforcement scheme of the FTC Act.

The FTC itself has described its “ability to seek an injunction that requires the defendant to … Read more

Extraterritorial Reach of U.S. Crypto Regulation by the SEC

In 2008, the world ushered in the blockchain era[1] with a whitepaper posted pseudonymously in an online discussion of cryptography under the name “Satoshi Nakamoto.”[2] That paper formed the foundation for Bitcoin, the first blockchain-hosted cryptoasset,[3] a new substitute for conventional government-backed currency that was designed to be “secure, international and fungible,” and free from the control of any government or other central authority.[4] Today, there are more than 9,000 different cryptoassets with a total market capitalization that has exceeded $2 trillion,[5] and we are long past the wild, wild west of unregulated crypto activity. … Read more

Why Board Diversity and the Nasdaq Rule Requiring It Make Sense

In December 2020, Nasdaq asked the Securities and Exchange Commission (SEC) to approve a new boardroom diversity rule.[1] The aim is for most Nasdaq-listed companies to have at least one director self-identifying as a woman and another self-identifying as an underrepresented minority or LGBTQ+.  The rule is not a requirement that listed firms have such (minimally) diverse boards, but instead is a requirement that firms either comply with this expectation or explain in their securities disclosure filings why they have not complied. Foreign companies and smaller companies will be given flexibility in satisfying this requirement with two women directors.… Read more

Paul Weiss Discusses Vertical Mergers and Investor Exit Strategies

Vertical mergers – those involving companies at different levels of the supply chain – are the subjects of increasing regulatory scrutiny by antitrust enforcement agencies. For much of the recent past, these acquisitions have largely been viewed as pro-competitive for various reasons and have rarely been subject to regulatory challenges in the United States (some non-US competition agencies have been more aggressive toward vertical mergers than US enforcers). Indeed, the US agencies’ current Vertical Merger Guidelines, adopted in mid-2020, recognize that “vertical mergers often benefit consumers” and state that vertically integrated firms may “be able to create innovative products … Read more

Religiosity, Higher Purpose, and the Effectiveness of Intense Board Oversight

Corporate boards that monitor their companies intensely engage in more effective oversight: Turnover of their CEOs is more closely linked to annual firm performance; CEO compensation is less often excessive; and earnings management is rarer. However, such boards are also associated with being lax in advising management and, as a result, the net impact of their intense monitoring on firm value is negative (e.g., Faleye, Hoitash, and Hoitash, 2011). More broadly, intense board monitoring destroys trust and hampers communication between the chief executive officer (CEO) and the independent directors and reduces the amount of strategic information that the directors receive … Read more

Davis Polk Discusses Insights from ABA’s Spring Antitrust Meeting

On March 23-26, 2021, the American Bar Association’s Section of Antitrust Law held its annual Spring Meeting virtually.  This annual event—which brings together government enforcers, policymakers, and antitrust practitioners on antitrust and consumer protection issues—was more relevant than ever at a time of a change in presidential administration in the United States, as well as vigorous enforcement agendas for both U.S. federal and state attorneys general and non-U.S. competition authorities.

Panelists from government and the private sector discussed a range of topics, including general enforcement agendas, sector-specific enforcement priorities, and the remedial authority of the U.S. Federal Trade Commission (“FTC”).  … Read more

Can Excess CEO Confidence Increase Risk of Corporate Failure?

A recent report by KPMG [1] on the behavior of chief executive officers (CEOs) suggests that 67 percent of UK CEOs trust their intuition over data. The impact of intuition may become problematic if it is driven by biased perception. One of the most common biases among CEOs is overconfidence, a tendency to believe that they are better than they objectively are, particularly in their judgment, ability, and knowledge.

In a recent paper, we investigate whether CEO overconfidence can help explain the probability of corporate failure. Despite extensive research exploring the consequences of managerial overconfidence for corporate policies and outcomes, … Read more

Skadden Discusses DOJ’s Use of FIRREA as Enforcement Tool

The Department of Justice (DOJ) under President Joe Biden is widely expected to increase its focus on white collar enforcement actions against individuals and financial institutions. We anticipate that we will see, as we did in the Obama years, an uptick in actions relying on the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). It has already been employed to address misconduct in connection with the government’s Paycheck Protection Program (PPP): In January 2021, the DOJ announced a civil settlement with the borrower of a PPP loan for violations of FIRREA and the False Claims Act based on false statements … Read more

The Rise of Dual-Class Stock IPOs

Public securities markets have undergone dramatic changes in recent years. Not only has the number of publicly traded firms been declining, but the nature of the firms that choose to go public has also changed. While publicly traded firms in the classic sense are thought of as widely-held  with dispersed shareholders, many of the firms that have recently elected to go public are tightly controlled by their founders or other entities via a dual-class stock structure. Almost 30 percent of IPOs in 2017-2019 had dual-class structures, including Snap, Twitter, and Dropbox. Because dual-class structures shield managers from the discipline of … Read more

Latham & Watkins Discusses ESG Considerations for Cryptocurrency

The huge rise in popularity of Bitcoin — and the growing interest by mainstream financial institutions in virtual assets as an investable and tradable asset class — has shone a light on the cryptocurrency industry’s environmental, social, and governance (ESG) performance.

The vast majority of the world’s financial institutions manage climate risk and other ESG risks in their own portfolios. As a result, many financial institutions perform related diligence on corporates they look to service, whether by traditional lending, capital markets underwriting, or direct investment. While the focus has primarily been on the ESG performance of cryptocurrency miners (given their … Read more

The New Separation of Ownership and Control: Institutional Investors and ESG

In recent weeks, the Securities and Exchange Commission (SEC) has devoted considerable attention to environmental, social and governance, or ESG, matters. It has requested public comment on climate disclosure proposals, appointed a senior policy advisor for climate and ESG, and announced that its 2021 examination priorities will include climate-related risks. Taken together, these developments indicate the SEC may be poised to mandate ESG-related disclosures. A recent post on this blog discussed the SEC’s interest in climate disclosures.

In a new article, “The New Separation of Ownership and Control: Institutional Investors and ESG,” forthcoming in the Columbia Business Law Read more

Patterson Belknap Discusses State Data-Privacy Laws and Potential Federal Legislation

With a dizzying array of state privacy laws on the horizon, the prospect of a federal solution has come into sharp focus.  Rather than a patchwork of regional legislation, a comprehensive national framework would potentially govern the precautions that companies must take when electronically collecting, using and storing customers’ personal information, regardless of where in the country the company—or the consumer—is located.  That is the current situation in the European Union under the General Data Protection Regulation (GDPR), and has been for many years.  It might one day be the case in the United States as well, if advocates of … Read more

Why Unions Lose Elections

Recently, workers at Amazon dealt what has been called a “decisive” and “crushing” blow to organized labor,[1] with their proposed union receiving less than 30 percent of the votes cast, according to the federal vote counters overseeing the election.  While union officials complain that Amazon cheated by campaigning too hard against the organizing effort, a close look at the election indicates that the better argument is that Amazon workers acted rationally.

The most likely explanation for the union’s drubbing was that Amazon workers had an informed and healthy concern that becoming unionized would make them worse off.  This … Read more

Shearman & Sterling Discusses How UK Banking Is Affecting Global FinTech

In an increasingly virtual world, law and regulation act as a vital safety net for businesses. The nature of that safety net varies, depending on the particular legal jurisdiction where the businesses are located. Global providers in the FinTech arena can be mobile and nimble and must choose their home country for these purposes carefully. The U.K. has leading-edge regulators, world class courts, a liberal regulatory landscape and a predictable legal system, based on the “common law” precedent-based method which is preferred globally. As such, the U.K. is uniquely positioned to develop reliable and trustworthy FinTech services and to build … Read more

How Exclusion of Women and People of Color May Have Affected Debates About Corporate Purpose

Over the last few years, the #MeToo and #BlackLivesMatter movements have facilitated a deeper understanding of racial and gender inequality and have, generally speaking, begun to create tangible changes within American life.  At the same time, corporations have begun to reflect on what role they play within the larger community.  Academic conversations over the past year have dedicated time and thought to the role of the corporation as it relates to race and gender.  One question deserving more time and attention, however, is the historical context in which the foundational debates on the appropriate role and purpose of the corporation, … Read more

Sidley Discusses SPAC Litigation in Delaware Courts

As commented on previously (here, here, and here), 2020 and the beginning of 2021 have seen an explosion in popularity of Special Purpose Acquisition Company (“SPAC”) deals.  As readers know, SPACs have become one of the predominant vehicles for raising funds outside of the traditional IPO.  Historically, SPACs have been the target of litigation relatively infrequently, but that trend is changing with the recent SPAC boom and the corresponding increase in public awareness and interest (including from regulators, short sellers, and the securities plaintiffs’ bar).  Along with the increase in federal securities suits filed against pre- … Read more

Taming Unicorns

Until the last decade, most startups that grew to become valuable businesses chose to go public. Late-stage startups with reported valuations over $1 billion used to be so rare that venture capitalist Aileen Lee called them “unicorns.” When she coined the term in 2013, there were only 39 startups claiming billion-dollar valuations. By 2021, despite the surge in companies going public through SPACs, the number of unicorns had passed 600. In a new article, Taming Unicorns, I argue that securities regulation needs to adapt to these new creatures.

Unicorns have developed a reputation for scandal, with the misconduct of … Read more

Skadden Discusses New EU Merger Regulation Guidance

The new Article 22 EU Merger Regulation (EUMR) Guidance[1] released by the European Commission (EC) enables the EC to review any acquisition, even those that do not qualify for notification under national (or EU) merger control rules.

Summary

  • The new guidance indicates that the EC will actively monitor deal activity to identify transactions that may be candidates for an Article 22 referral. While a formal referral request should be made by a national competition authority (NCA), the EC will “encourage and accept” referrals and may proactively “invite” NCAs to make referrals, even if national merger control thresholds are not met.

Read more

The Underside of Hedge Fund Activism: Looting the Pension Fund

Hedge fund activism is a topic on which most law professors have closed their minds. They learned in student days that activist hedge funds are excellent agents of change that efficiently discipline managements at targeted firms and increase shareholder wealth. Maybe that generally happens, but we cannot stop there.

Even if activism increases shareholder wealth, that still leaves open the question of where these wealth increases come from. The standard view is that activists increase firm productivity, force the “deconglomeratization” of stagnant firms, and expose others to efficient takeovers. Of course, that does happen — sometimes. But the rival view … Read more

O’Melveny & Myers Discusses the Legal Challenges of NFTs

Non-Fungible Tokens, or NFTs, are big news these days. After an NFT for a piece of digital art by the artist Beeple (Mike Winkelmann) sold for $69 million in March 2021―making it the third-most expensive artwork by a living artist―businesses and their lawyers have been scrambling to understand the legal issues surrounding NFTs, not to mention the meaning and value proposition of this novel class of digital assets for online marketplaces and digital content developers.

An NFT is a unique digital asset. For example, NFTs can be associated with a blog post, a sports highlight, or in the … Read more

Repurposing the Corporation Through Stakeholder Markets

In a new article, I argue that standardized, credible, publicly available ESG information will enable corporations’ stakeholders and potential stakeholders to repurpose their corporations. By “repurpose,” I mean control the corporation and redirect its employees’ efforts to corporate social responsibility (CSR).

Repurposing’s mechanism will be the competitive markets in which the corporations acquire their resources from potential stakeholders. Potential stakeholders – persons considering becoming or remaining customers, employees, suppliers, investors, or host communities – will, by their decisions, confer benefits on the corporations they choose (ESG Benefit).  Most will exercise their discretion to confer ESG Benefit in accord with CSR … Read more

SEC Speaks on Accounting and Reporting Considerations for SPAC Warrants

In a recent statement,[1] Acting Chief Accountant Paul Munter highlighted a number of important financial reporting considerations for SPACs.[2] Among other things, that statement highlighted challenges associated with the accounting for complex financial instruments that may be common in SPACs. Additionally, CF staff also issued a recent statement[3] highlighting key filing considerations for SPACs.

We recently evaluated fact patterns relating to the accounting for warrants issued in connection with a SPAC’s formation and initial registered offering. While the specific terms of such warrants can vary, we understand that certain features of warrants issued in SPAC transactions may

Read more

SPACs, IPOs, and Liability Risk Under the Securities Laws

Over the past six months, the U.S. securities markets have seen an unprecedented surge in the use and popularity of Special Purpose Acquisition Companies (or SPACs).[1],[2] Shareholder advocates – as well as business journalists and legal and banking practitioners, and even SPAC enthusiasts themselves[3] – are sounding alarms about the surge. Concerns include risks from fees, conflicts, and sponsor compensation, from celebrity sponsorship and the potential for retail participation drawn by baseless hype, and the sheer amount of capital pouring into the SPACs, each of which is designed to hunt for a private target to take

Read more

Ownership Piercing

In a new article, I build upon the paradox of ownership. My central thesis is that those who own are not always in control; therefore, those who control should be held accountable like the owners would if they were in control.

I am inspired by the theory of the firm, particularly, the model created by professors Sanford Grossman and Oliver Hart in their path-breaking article, The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration. Grossman and Hart posit that “we do not distinguish between ownership and control and virtually define ownership as the power … Read more

Shearman & Sterling Discusses Financial Regulators’ Request on How Firms Use AI

On March 29, the Federal Reserve Board, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the National Credit Union Administration (the “Federal Agencies”) issued a request for information (“RFI”) from financial institutions, trade associations, consumer groups, and other stakeholders on the financial industry’s use of artificial intelligence (“AI”). The RFI broadly seeks insight into the industry’s use of AI in the provision of financial services to customers and appropriate AI governance, risk management, and controls. While the RFI should not come as a surprise (for several years, regulators have … Read more

What Can Autonomous Corporations Teach Us About Legal Personhood?

Corporations are increasingly using technology to conduct business, seeking greater automation and efficiencies while decreasing costs. Indeed, several states are considering changes to their business-formation laws to accommodate completely automated businesses – those run through, or by, self-executing computer code and artificial intelligence. Internationally, several jurisdictions already offer corporation-equivalent business structures to completely automated businesses. Together, these developments set the stage for a world where autonomous business organizations enjoy the same rights and responsibilities as corporations – a world in which an autonomous organization enjoys the legal fiction of personhood. In a new article, Autonomous Corporate Personhood,[1] I … Read more

Cravath Discusses Board and Management Responses to ESG Considerations

Environmental, social and governance, or “ESG”, considerations are seemingly ubiquitous in the current financial, corporate and regulatory landscape. In parallel with the socio-economic upheaval of 2020 and a continuing academic debate around corporate purpose and the efficacy and forms of stakeholder governance,[1] investors are increasingly using ESG factors in decisions about how to allocate their capital.[2] This trend is seen in investors of all varieties, from large institutions (such as BlackRock and State Street, each of which has regularly published annual letters to the companies in which they are invested emphasizing ESG matters, including in 2021[3]), to a growing number … Read more

The Banker Removal Power

The Federal Reserve can, under 12 U.S.C. § 1818(e), remove bankers from office if they violate the law, engage in unsafe or unsound practices, or breach their fiduciary duties. Yet the Fed has used this power so rarely that few people even realize it exists. In the past 20 years, America’s largest banks have settled hundreds of major lawsuits and paid an unprecedented $195 billion in fines and penalties. They have admitted to fraud, bribery, money laundering, price fixing, bid rigging, illegal kickbacks, discriminatory lending, and a host of other consumer protection violations. In 2019, the U.S. Department of … Read more

Ropes & Gray Discusses FCPA as an Enforcement Priority Under New Administration

On March 10, 2021, the United States Senate confirmed D.C. Circuit Judge Merrick Garland as the incoming Attorney General to lead the Department of Justice (DOJ).  The confirmation of Biden’s nominee to lead the Securities & Exchange Comission (SEC), Gary Gensler, is likely to follow.  These selections for the heads of the two regulatory bodies that enforce the Foreign Corrupt Practices Act (FCPA) are expected to reinforce the focus on this area, reflecting President Biden’s remarks on the topic.  Increased enforcement based on the changing political landscape may also be exacerbated by the increased risk posed by massive government spending … Read more

The Darwinian Dynamics of Contracting

First-year law students typically learn that the terms of a contract represent a snapshot of the parties’ mutual intent, captured at the “magic moment” of contract formation. In reality, however, contractual sausage making is far messier than this idealized account admits. Even sophisticated negotiators can (and do) fall prey to inattention, bad planning, poor information, slothful mimicry, bad negotiating or decision-making skills, and more. And when they do, the contract terms they adopt may diverge from shared intent – sometimes substantially. In short, contracts are often the products of their environments, including political constraints, economic exigencies, and the inherent limitations … Read more

Sidley Austin Discusses Delaware Chancery’s Latest Guidance on Poison Pills

In a tale of what is old is new again, the Delaware Court of Chancery reviewed the propriety of a poison pill — a bulwark of the 1980s takeover era — but in the context of shareholder activism against the backdrop of the COVID-19 pandemic. Vice Chancellor Kathaleen McCormick’s detailed review of the pertinent case law and fact-specific decision to permanently enjoin The Williams Companies, Inc.’s extraordinary 5% poison pill offers a number of lessons for directors considering the adoption or renewal of a similar device. The Williams Cos. S’holder Litig. (Del. Ch. Feb. 26, 2021).

In March 2020, … Read more

A COVID-19 Quandary: Does a Force Majeure Clause Displace the Frustration Doctrine?

The frustration (or “frustration of purpose”) doctrine excuses a party from its contractual obligations when an extraordinary event completely undermines its principal purpose in making the deal. Historically, the doctrine has played a marginal role in contract law, as parties very rarely invoked it – and almost always without success. Courts are understandably reluctant to relieve parties from their contracts and will only do so in very unusual cases. Thus, frustration has long been an obscure doctrine, taught in law schools but infrequently litigated in court.

All that changed in 2020, as the COVID-19 pandemic – and government orders to … Read more

Latham & Watkins Provides Beginner’s Guide to NFTs

Earlier this month, a blockchain firm bought a US$95,000 print by the British street artist Banksy, only to burn it in a livestreamed video and re-sell it for US$380,000 as a virtual asset called a non-fungible token (NFT) — sparking a flurry of news around what may prove to be this year’s hottest crypto craze.

How did the Banksy sale work? The group explained that by removing the physical piece from existence and releasing the NFT as digital art, the value of the physical piece will be moved onto the NFT. This trend isn’t just setting the art world ablaze; … Read more

The Shareholder in France and the U.S.: Comparing Corporate Legal Priorities

The fundamental question in the law of business organizations – what is the purpose of the corporation? – contains a related question of constituencies and, therefore, priorities among them: Whom does the corporation serve?  If, for example, the purpose that justifies the existence of the corporation is the maximization of share price, then it follows that the corporation exists to serve the shareholders that are the beneficiaries of share price increases.  The answers to such questions are encoded in the laws governing the decisions of a corporation’s directors and managers and regulating the transactions that allocate the benefits and the … Read more

Quinn Emanuel Discusses SPAC Litigation Risks

Special purpose acquisition companies, or SPACs, took 2020 by storm, with nearly 250 SPACs raising around $83 billion through initial public offerings (“IPOs”)—more than the previous five years combined.[1] The SPAC boom has only accelerated in 2021, with over 200 SPACs raising nearly $70 billion by the start of March.[2]

A SPAC is a shell company that raises money through an IPO with the purpose of identifying a private company to merge with and bring public in what is commonly referred to as a “de-SPAC transaction.” If the SPAC does not identify a suitable target company within a specified period … Read more

Covid and Cultural Due Diligence in M&A          

There’s reason to believe that M&A will rebound in 2021, according to Ernst & Young research.[1] Nevertheless, the multifarious challenges created by the Covid-19 pandemic have significantly altered the climate for acquisitions.[2] Even in normal times, getting a deal to close does not guarantee long-term success of any business combination. According to a 2019 study by Deloitte, business executives increasingly cite successful post-merger integration “as the single most important factor that leads to a successful transaction (23 percent this year, up from 21 percent last year).”[3] Despite that acknowledged need to focus early on firm integration, many … Read more

SEC’s Acting Chief Accountant Discusses Reporting and Auditing Issues for Companies Merging with SPACs

In recent years, we have seen significant market developments and innovation in our capital markets, with a variety of structures being utilized to raise capital and facilitate taking private companies public.[1]

The U.S. capital markets are often described as the envy of the world, and we in OCA continue to promote healthy public markets. However, our efforts to facilitate capital formation are not carried out in isolation since each tenet of the U.S. Securities and Exchange Commission’s (“SEC”) three-part mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation is vital to our work. Regardless

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Regulating SPACs — Before It’s Too Late

Although it has been used in the past, the resurgence of the Special Purpose Acquisition Company (SPAC) has been spectacular in the last two years. According to its promoters, a SPAC offers relatively easy access to a listing on a regulated exchange for a private company looking to go public. The sudden proliferation of SPACs has prompted the SEC to investigate how underwriters are managing the risks involved, according to Reuters. [1] The investigation has so far involved letters from the  SEC’s enforcement division asking the underwriters to provide the information voluntarily and, as such, has not yet risen to … Read more

Latham & Watkins Discusses New CFTC Climate Risk Unit

On March 17, 2021, the Commodity Futures Trading Commission (CFTC) announced the establishment of an interdivisional Climate Risk Unit (CRU) to assess the risks to US financial stability posed by climate change. The CRU aims to be a catalyst for change by highlighting the derivatives markets’ role in understanding, pricing, and addressing climate-related risks, as well as its role in the transition to a low-carbon economy.

The announcement was made by Acting Chairman Rostin Behnam, whose efforts to steer the CFTC’s focus toward climate-related impacts on the financial system led to the publication of a landmark report by the CFTC’s … Read more

Discretionary Decision-Making and the S&P 500 Index

Discretion is an integral part of how indices, including stock market indices, are constituted, according to professors Rauterberg and Verstein and Robertson (here and here), and the S&P 500 index is no exception.

The S&P 500 is a market-weighted compilation of the share prices of common stock issued by 500 companies that are considered to represent blue-chip America. It is governed by the S&P’s U.S. Index Committee (“Committee”), which has almost total discretion in determining the companies that constitute the S&P 500.

In our new article, we find that the Committee’s discretionary decision-making has resulted in the … Read more

Clifford Chance Discusses the Cost of Commodities and Derivatives Market Enforcement Cases

The trend of escalating penalties for derivatives and commodities market abuse violations continued in 2020. Civil monetary penalties exceeding $100 million have become commonplace for serious corporate violations. Moreover, the DOJ routinely conducts criminal investigations in parallel with the CFTC, levying its own very large penalties against corporate targets and seeking convictions and incarceration for individuals.  On February 2, the CFTC increased the maximum civil monetary penalties it can seek for violations of the Commodity Exchange Act (“CEA”) and the Commission’s rules and regulations.   However, as explained below, it has also become apparent in recent years that charges and penalties … Read more

How Blockchain-Based Financial Markets Can Create Systemic Risks That Harm Lower-Income People

Blockchain-based platforms create exciting possibilities for financial inclusion: widespread ownership of deposit accounts and access to payments services. From a macro-level perspective, however, these platforms can aggravate systemic risks. Systemic instability, in turn, threatens financial inclusion and sustainability.

Sustainable finance, as used here, means continuously providing financial inclusion and access to credit. Emerging financial technologies, or fintech, such as cryptocurrencies and blockchain-based financing platforms, have potential to create access to banking services, investment possibilities, and capital for those currently underserved in these areas.

Yet blockchain-based financial activity has the potential to threaten market stability in two different ways. First, it … Read more

ESG Investing After the New Labor Department Rule on “Financial Factors”

In the wake of the U.S. Department of Labor’s new rule on “Financial Factors in Selecting Plan Investments,” adopted last November and effective as of January 12, 2021, some ERISA fiduciaries and their advisers have expressed concern about the permissibility of ESG investing. This summary of the rule aims to dispel that concern. In brief, the final rule confirms the permissibility of ESG investing by an ERISA fiduciary to improve risk-adjusted returns. Fiduciaries that use ESG factors to improve risk-adjusted returns have nothing to fear from the rule, and indeed should be reassured by it.

Much of the concern … Read more

How the Covid-19 Pandemic Affected the Cryptocurrency Market

In our recent paper, we conducted an empirical analysis to test how the outbreak of the Covid-19 pandemic affected the market for cryptocurrencies (“cryptomarket”). One year into the pandemic, this market seems to have boomed. For instance, when the pandemic erupted, Bitcoin – the world’s first cryptocurrency – could be purchased for about $7,300. Today, the very same token costs more than $46,800 – a staggering 640 percent rise. Other leading cryptocurrencies (e.g. Ether), showed similar (or even greater) increases. However, this upward trend is not necessarily obvious from a theoretical standpoint, as there are several forces that might drive … Read more

Paul Weiss Discusses How to Mitigate SPAC Litigation Exposure

The explosive growth in Special Purpose Acquisition Companies (“SPACs”)[1] is starting to generate significant amounts of litigation. Scores of civil lawsuits have been filed against SPAC sponsors and/or their directors and officers since the start of 2020, with more than 50 securities or stockholder cases filed in the federal courts alone. We expect this represents the tip of the iceberg.  With intense public attention on SPACs, including from incoming SEC Chairman Gary Gensler,[2] acting Director of the SEC’s Division of Corporate Finance John Coates,[3] and the SEC’s Office of Investor Education and Advocacy,[4] as well as … Read more

Prosocial Antitrust

Recent developments have placed antitrust law on a collision course with corporate purpose. In a new paper, I reveal the unforeseen negative impacts of this conflict and provide a roadmap for avoiding them.

Businesses and investors are increasingly embracing an expansive view of corporate purpose – one that looks beyond profit-maximization and addresses systemic risks, such as climate change and income inequality. This broad view of corporate purpose is championed not only by employees, lawmakers, NGOs, and society at large, but also by the world’s largest investors and asset managers, who are urging companies to serve a social purpose. … Read more

Wilson Sonsini Discusses SEC Focus on Climate Change Disclosures

In a series of recent public statements and announcements, the U.S. Securities and Exchange Commission (SEC) has signaled that climate change disclosures will be front and center on its agenda.

These announcements come as Gary Gensler, President Biden’s nominee for Chairman of the SEC, awaits confirmation from the U.S. Senate. Mr. Gensler’s confirmation appears imminent following the vote, on March 10, 2021, by the Senate Banking Committee to send his nomination to the full Senate for approval.

With Mr. Gensler’s confirmation pending, the SEC is being led by Acting Chair Allison Herren Lee, a consistent advocate of more robust … Read more

GameStop, Social Media, and the Phenomenon of Expressive Trading

There is evidence that at least some of the recent social-media-driven “meme” trading in stocks such as GameStop is being driven by motives other than profit seeking. In fact, many of the retail traders involved in the recent short-squeeze frenzy have stated publicly that they are buying and holding their positions as a form of social, political, or aesthetic expression.

Retail securities traders are typically classified as either investors or speculators. Investors research a stock’s fundamentals and buy it with the expectation that it will perform well over time. Speculators are less concerned with a stock’s fundamentals than its potential … Read more

Gibson Dunn Discusses Mandatory Corporate Human Rights Due Diligence

In this two-part alert, we examine key global legislative developments and proposals in the bourgeoning field of mandatory corporate human rights due diligence. In Part One (available here), we looked at very recent steps taken by the institutions of the EU towards implementation of legislation at a pan-European level.  In this Part Two, we consider developments within the EU and in the UK, and we also look beyond Europe, to APAC, the US and Canada.

Developments Within Europe

France

In 2017, France introduced a pioneering piece of legislation: the Loi de Vigilance[1]  (the “LDV”), which inserted … Read more

Regulating Digital Currencies: Towards an Analytical Framework

In a new article, I examine the development and regulation of digital currencies, which are monetary currencies that are evidenced electronically. Large “wholesale” payments among businesses and financial institutions already occur electronically, and bitcoin has been with us for more than a decade. Three recent events, though, are prompting the development of a “retail” digital currency – one used by consumers as an alternative to cash.

First, the People’s Bank of China has been working on a retail digital currency since 2014. It now has trial runs going in four cities. Second, Facebook announced in 2019 that it will … Read more

Cleary Gottlieb Discusses DOL’s Declining to Enforce Rules on ERISA Plan Investments and Proxy Voting

On Wednesday, March 10, after engaging in conversations with stakeholders, the U.S. Department of Labor’s Employee Benefits Security Administration issued an enforcement policy statement in which it declined to enforce two DOL rules put in place by the Trump administration in 2020.

The first of these rules placed limitations on the ability of plans subject to ERISA to invest in environmental, social and governance (“ESG”) funds. In particular, it provided that a fiduciary’s duty of loyalty and prudence under ERISA would only be satisfied if investments were selected solely on the basis of pecuniary factors (defined as factors that have … Read more

Short Sellers, Short Squeezes, and Securities Fraud

Securities fraud and short sellers are strange bedfellows. The stereotypical story involving both happens when short sellers bring to light false statements of issuers, prompting corrective disclosures and giving shareholders a cause of action. At times, issuers accuse these short sellers, usually unsuccessfully, of market manipulation or deception to drive prices down toward the level of their own positions. Courts and regulators have not given much attention, however, to whether the private securities litigation framework works when atypical investors such as derivatives traders and short sellers want to be plaintiffs themselves.

Even for those who believe that private securities fraud … Read more

SEC Commissioner Speaks at Asset Management Advisory Committee Meeting

Good morning to you all and thank you Ed [Bernard]. It is always a pleasure to welcome the hard working volunteers of AMAC back to the Commission. I also want to thank Sarah ten Siethoff and the staff of the Division of Investment Management for their work in keeping AMAC’s wheels turning. In particular, I would like to thank Christian Broadbent, Jay Williamson, Walé Oriola, and Emily Rowland who are so instrumental in making these meetings happen.

We are now well into the New Year but in some respects, 2021 is looking a lot like 2020. We continue to interact

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ESG Incidents and Shareholder Value

Corporations increasingly integrate environmental, social, and governance (ESG) issues into their business practices and signal this by committing to sustainability initiatives, such as the UN Global Compact or the 2019 Business Roundtable Statement on the Purpose of a Corporation. This development has spurred a debate on whether companies can become more profitable by creating societal value (e.g., Edmans 2020), but there is relatively little discussion of companies that have been involved repeatedly in ESG-related incidents. For example, before its Deepwater Horizon oil spill in 2010, BP had a long history of major and minor environmental and safety incidents. Between 2007 … Read more

Latham & Watkins Discusses Whether NFTs Are Securities

As the current crypto boom has progressed, it seemed Decentralized Finance (DeFi) had cemented its position as the dominant new narrative of this cycle. This view is supported by the tens of billions of dollars that have flowed into DeFi protocols over the past twelve months. Yet, amid renewed public interest, non-fungible tokens (NFTs) show signs that they should not be overlooked in discussions regarding the hottest new developments in the crypto space. As with any fast-moving market driven by explosive consumer interest and waves of money, regulators will likely take an interest and scrutinize market practices against existing regulations.… Read more

The Information Mechanism in Corporate Citizenship: Evidence from COVID-19

When governments fail to respond quickly and effectively to a crisis, can companies help address the issue? In a recent article, we explore an important mechanism through which firms can do so as corporate citizens: information transmission within organizations. Specifically, we study whether U.S. firms’ business networks with China and Italy, including trade, executive, and branch-office networks, become information networks that can be used to mitigate the negative impacts of COVID-19.

COVID-19 and measures intended to contain its spread resulted in significant societal change and required governments to take unprecedented measures. Meanwhile, for companies, the pandemic made employee safety a … Read more

Cooley Discusses SEC’s Regulation Fair Disclosure Charges Against AT&T

The SEC recently brought charges against AT&T and three mid-level executives for selectively providing information to Wall Street analysts in alleged violation of Regulation Fair Disclosure (Reg FD). According to the complaint filed in the Southern District of New York, AT&T learned in March 2016 that a “steeper-than-expected” decline in its first quarter smartphone sales would lead the company to fall an estimated $1 billion short of analysts’ quarterly earnings estimates.

According to the SEC’s allegations, AT&T decided to make a public disclosure “to manage market expectations.” At a scheduled investor conference on March 9, 2016, AT&T’s CFO noted that … Read more

Why M&A Rumors Cause a Dip in Firm Productivity

Rumors are common in financial markets and often relate to mergers and acquisitions (M&A). While the majority of M&A rumors originate from speculation or opinion pieces (Jia et al., 2020) and never turn into deal announcements, academic research finds that they are associated with significant stock price reactions (e.g., Ahern and Sosyura, 2015; Betton, Davis, and Walker, 2018). Since M&A rumors are disruptive events that are associated with job loss and organizational change, it is worth examining their heretofore unknown operational consequences for the firms and people involved. In this study, we use thousends of M&A rumors between 1999 and … Read more

Acting Chair Lee Speaks on Meeting Investor Demand for Climate and ESG Information at the SEC

Thank you, John [Podesta], and thanks to the whole team here at the Center for American Progress, for hosting me today. I’ve had the honor of serving as Acting Chair of the SEC for nearly two months now, and I appreciate the opportunity to reflect on the enhanced focus the SEC has brought to climate and ESG during that time, and on the significant work that remains. Along with shepherding the agency through the transition and supporting the work of the SEC staff, no single issue has been more pressing for me than ensuring that the SEC is fully engaged

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The Management Case for Inclusionary Corporate Purpose

The most vital and deeply practical argument for more broadly understanding corporate purpose comes from the management literature and the data on how to motivate people in organizations. Put simply, people in organizations do not work as hard or come up with as many innovations for companies unless they see themselves as part of a broader purpose beyond wealth maximization for shareholders. Employee engagement, first described in management literature, and now addressed even in mainstream business publications such as Forbes, is “the emotional commitment [an] employee has to the organization and its goals. When employees care … Read more

Latham & Watkins Discusses Virginia Consumer Data Protection Act

On March 2, 2021, Virginia Governor Ralph Northam signed comprehensive state privacy legislation titled the Consumer Data Protection Act (CDPA). Previously, the Virginia Senate unanimously passed the bill on February 5, 2021, and the Virginia House of Delegates followed suit in a special legislative session on February 18, 2021. The law will take effect on January 1, 2023. This post addresses some key provisions.CDPA

Scope

The CDPA will apply to businesses that conduct or process personal data of at least 100,000 consumers or businesses that control or process personal data of at least 25,000 consumers and derive over 50% of … Read more

Pay for Destruction: The Executive Compensation Arrangements That Encourage Value-Decreasing Stock Buybacks

We are living through a stock buyback revolution. Over the last decade, the amount that U.S. public firms have spent on buying back stock from their shareholders rose threefold to a record level of roughly $1 trillion in each of 2018 and 2019. By the end of 2019, the scale of buyback activity had increased to the point that total shareholder payouts (stock buybacks and dividends together) took up the full amount of corporate earnings. After a pandemic-related pause in 2020, the buyback wave is roaring to life again.

The economic and financial importance of stock buybacks has sparked a … Read more

Wachtell Lipton on Whether the SEC Is Pushing the Boundaries of Regulation FD

On March 5, the SEC brought an enforcement action charging a public company and three of its investor relations personnel with violations of Regulation FD, alleging that the company’s IR personnel had fed non-public information to sell-side research analysts in order to bring their consensus revenue views more into line with the company’s own internal estimates.  The defendants are all contesting the charges, and the case will be litigated in federal court.  While some commentators may see this as an instance of the SEC pushing the Regulation FD envelope, our view is this:  if the SEC is ultimately able to … Read more

The Agency Costs of Sustainable Capitalism

At the World Economic Forum in Davos in January 2020, Larry Fink – the chief executive of the world’s largest asset manager, BlackRock – wore a climate change-themed scarf. It featured the “warming stripes” visual, where the color of the stripes represented the annual average temperatures of planet earth from 1850 to 2019. The scarf served to emphasize Fink’s – and BlackRock’s – professed commitment to putting sustainability at the center of the firm’s investment approach. Yet, in a new paper, I argue that, when it comes to climate change, there are significant gaps between the interests … Read more

Simpson Thacher Discusses SEC Framework for Use of Derivatives by Regulated Funds

In a widely anticipated action that was years in the making, the SEC adopted Rule 18f-4 under the 1940 Act prior to the conclusion of former Chair Jay Clayton’s tenure.  The rule overhauls the regulatory framework for the use of derivatives and similar transactions by regulated funds, which for purposes of the rule includes registered closed-end funds, BDCs and registered open-end funds (including mutual funds and ETFs but excluding money market funds). Importantly, regulated funds can continue to follow the current asset segregation approach when investing in derivatives until the rule’s compliance date of August 19, 2022 (the “Compliance Date”).… Read more

The Lowdown on SPACs

In 2020, the number of IPOs by a Special Purpose Acquisition Company (SPAC) set records: A total of 248 SPAC IPOs raised over $75 billion. The boom continues in 2021: Each of January and February has seen over 90 SPAC IPOs, an unprecedented pace.

In a new working paper, we examine the structure of SPACs and discuss the economic tensions surrounding them.

What Is a SPAC?

A SPAC, a blank-check company created by a sponsor, goes public to raise capital and then find a non-listed operating company to merge with, in the process taking the company public. Units, usually priced … Read more

Kirkland & Ellis Discusses ESG and Climate Regulatory Developments Affecting Private Equity

In the second half of 2020, demand for ESG-focused investments continued to accelerate, and data showing the outperformance of those investments during the COVID-19 pandemic has set the stage for robust demand to continue in 2021. In his recent letter to CEOs, BlackRock CEO Larry Fink highlighted that during 2020, 81% of a globally representative selection of sustainable indexes outperformed their parent benchmarks, indicating companies with better ESG profiles perform better than their peers. Private equity managers seem to agree: in a 2020 survey of over 50 private equity executives, 93% indicated that focusing on ESG themes generates good … Read more

Toward a Better Coordinated Regulatory Response to Cryptoassets

On Monday, January 8, 2021, Tesla announced in a filing with the Securities and Exchange Commission that it had purchased $1.5 billion worth of Bitcoin.[1] This purchase coincided with a dramatic increase in the price of the cryptoasset, which was trading at around $37,000 per Bitcoin on February 5, 2021, but climbed to over $48,000 per Bitcoin on February 11.[2] Bitcoin is unusual in the United States, because it is one of a handful of cryptoassets that are not regarded as securities and regulated as such by the Securities and Exchange Commission (SEC). In fact, of cryptoassets with … Read more

Patterson Belknap Discusses Consumer Data Privacy in New York

As the national landscape of data privacy laws evolves, New York may be poised to follow California in passing legislation that creates new data rights for New York consumers.  New York is no stranger to this field.  The New York Department of Financial Services’ cybersecurity regulation was the first of its kind in the nation, aimed specifically at the banking and insurance industries.  The Stop Hacks and Improve Electronic Data Security (“SHIELD”) Act continued the trend beyond the financial services industry, heightening breach disclosure requirements and imposing enhanced rules for businesses holding the personal data of New York residents.  And … Read more

Market Myopia’s Climate Bubble

A growing number of financial institutions, from BlackRock to the Bank of England, have reached the conclusion that markets are not accurately assessing climate change-related risks. European Central Bank President Christine Lagarde recently warned that central bankers “will have to ask themselves” if they are “taking excessive risk by simply trusting mechanisms that have not priced in the massive risk that is out there.”[1] According to one survey, 93 percent of institutional investors agree with her that climate risk “has yet to be priced in by all the key financial markets globally.”[2]

Yet while the consensus (and evidence) … Read more

Skadden Discusses Trends in Securities Class Action Filings

Despite unprecedented disruptions to the court system from the COVID-19 pandemic, plaintiffs continued to bring securities class actions at elevated levels in 2020 — a sign that filings will remain high in the year ahead. Based on data from Cornerstone Research through September 30, 2020, plaintiffs were on pace to file approximately 375 federal and state securities class actions through the end of the year. Although lower than the more than 400 actions filed in each of the previous three years, this figure is still substantially higher than the 261 cases brought, on average, between 2010 and 2019.

The moderate … Read more

Stealth Acquisitions and Product Market Competition

In a recent study, we examine whether firms structure their mergers and acquisitions (M&A) to avoid scrutiny from antitrust regulators as well as whether such deals reduce product market competition.

While M&A deals are often triggered to create value, they are scrutinized for antitrust violations in all of the world’s major economies. We find robust evidence of bunching in M&A transaction values just below the threshold required for submitting premerger notification filings for assessment of antitrust concerns by U.S. agencies. These “stealth acquisitions” entail contractual terms with lower deal premiums that facilitate avoidance of antitrust review, payoff functions that allow … Read more

Davis Polk Discusses New SEC Climate and ESG Enforcement Task Force

On March 4, the Securities and Exchange Commission announced a newly created Climate and ESG Task Force in the Division of Enforcement. The Climate and ESG Task Force will work closely with other areas of the SEC as part of the agency’s recently enhanced efforts to address climate and environmental, social and governance, or ESG, matters.

Materiality

The 22-member task force will develop initiatives to identify ESG-related misconduct.  Its initial focus will be to review public company disclosures to identify “material” gaps or misstatements regarding climate risks. The Climate and ESG Task Force will also review investment adviser and fund … Read more

Distinguishing Social Enterprise Lawyering

The rise of for-profit, mission-driven (“hybrid”) entities has prompted legal scholarship on corporate law innovations and governance considerations in the social enterprise context. A consistent theme of this scholarship is skepticism of whether these hybrid entities create value, given the inherent flexibility of business associations and judicial deference to management in operational business decisions. It nonetheless seems clear that social entrepreneurship – achieving social missions using market-based strategies – and hybrid entities are here to stay.

Given the likely growth of social entrepreneurship, it is important that legal scholars devote attention to how social enterprise clients shape or influence … Read more

Commissioners Discuss SEC’s Enhanced Climate-Change Efforts

Over the past two weeks, we and the public have seen a steady flow of SEC “climate” statements and press releases.[1]  Our Divisions of Corporation Finance, Examinations, and Enforcement all have announced climate- or ESG-related initiatives.  What does this “enhanced focus” on climate-related matters mean?  The short answer is: it’s not yet clear.  Do these announcements represent a change from current Commission practices or a continuation of the status quo with a new public relations twist?  Time will tell.  In the meantime, it is important to contextualize the recent announcements by providing some historical and procedural background.

The Division

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Corporate Venture Capital

Why are venture capitalists the winners in the startup funding game?  VCs have funded most of the big-name startups that now dominate the NASDAQ and, in a sense, have been the only game in town for high-growth startups needing millions to grow as private companies.  Entrepreneurial finance’s ancillary players – angel investors, venture lenders, and now crowdfunding investors – all depend on VCs to fund and advise startups as they grow and either exit via IPO or sale to a larger company.

But there is one player whose entry into this space can significantly alter that dynamic: the large corporation.  … Read more

Skadden Discusses First DOJ Criminal Challenges to Wage-Fixing and No-Poach Agreements

More than four years after the U.S. Department of Justice (DOJ) and U.S. Federal Trade Commission (FTC) jointly released the Antitrust Guidance for Human Resource Professionals in 2016 (Antitrust Guidance), the DOJ has brought its first criminal indictments for wage-fixing and no-poach agreements.

The 2016 Antitrust Guidance, released in the last few months of the Obama Administration, warned human resource professionals that agreements between competitors to set wages or to refrain from soliciting each other’s employees — so-called no-poach agreements — could result in criminal prosecution under U.S. antitrust laws. The guidance represented a considerable expansion of the agencies’ enforcement … Read more

Liquidity, Pledgeability, and the Nature of Lending

In a new paper, we explain that variation in prospective liquidity in an industry or economy prompts changes in corporate lending and banking, including changes in the level of corporate borrowing, the type of debt contracts issued, the covenants contained in them, and the role and leverage of banks.

We start with the basic principle that the nature of business lending in an economy changes over a financial cycle. This includes the amount of debt that a borrower can take on and the extent to which banks play an important role or become dominated by non-bank lenders issuing arm’s length … Read more

Wilson Sonsini Discusses Bill to Reshape U.S. Antitrust Enforcement

On February 4, Senator Amy Klobuchar introduced the Competition and Antitrust Law Enforcement Reform Act (CALERA), which provides for wide-ranging changes to the U.S. antitrust laws.[1] CALERA follows the release of a report last year by the staff of the House Judiciary Committee Democrats, led by Representative David Cicilline.[2] Senator Klobuchar’s legislation proposes significant changes to the antitrust laws but is less radical than some of the recommendations in the House Judiciary Committee report. Still, if enacted, CALERA would result in the most significant changes to antitrust law in decades, likely resulting in more aggressive merger enforcement, particularly … Read more

Securities Regulation and Class Warfare

In a new article, I examine the regulatory goals of creating “fair, orderly, and efficient” securities markets in light of the recent issues involving trading in the shares of GameStop Corp. (GME) through the broker-dealer firm Robinhood Financial LLC.  The article contributes to the literature on the regulation of securities markets by explaining what the terms “fair,” “orderly,” and “efficient” markets really mean.  A fair market is a market in which average, “Main Street” investors get what they pay for.  Under this definition, U.S. capital markets are generally fair because they are generally efficient. Efficient markets reflect all relevant information … Read more

Ropes & Gray Discusses President Biden’s Buy American Executive Order

On January 25th, 2021, President Biden signed Executive Order 14005, entitled “Ensuring the Future Is Made in All of America by All of America’s Workers,” (“EO”), aimed at increasing the federal government’s procurement of American-made supplies. This EO has potentially significant implications for all businesses that sell and supply products to the federal government, ranging from life sciences and health care companies to IT and software providers, defense contractors, and any other company doing business with the federal government. The order has little immediate effect, but directs agencies to seek to increase the domestically produced content of the American-made … Read more

The Government Tools for Responding to Market Distress

In the spring of 2020, as the Covid-19 pandemic shut down economies around the world, pressure arose for governments to respond to the growing threat of pandemic-related market distress. In the United States, the initial proposals for government action varied in nature and focus. Some proposals targeted the financial system while a few targeted small businesses and individuals. Others were intended to bail out large businesses and specific industries. Still other proposals took a more institutional focus. In the context of bankruptcy law, many experts imagined building up the bankruptcy system as a primary bulwark against a seemingly imminent wave … Read more

Sullivan & Cromwell Discusses Bill to Strengthen Regulators’ Power to Block Mergers

On February 4, 2021, Senator Amy Klobuchar, chair of the Antitrust Subcommittee of the Senate Judiciary Committee, introduced a bill entitled “The Competition and Antitrust Law Enforcement Reform Act” (the “Bill”).  If enacted, the Bill would fundamentally revise longstanding U.S. federal antitrust laws by forcing the merging parties to shoulder the burden of proof in a variety of common combination scenarios, and would provide regulators with various other powers and augmented resources.  In particular, the Bill would position regulators to more aggressively pursue transactions involving nascent or potential competitors, which have also faced heightened scrutiny under European competition laws.

The … Read more

How Department of Labor Rules on ESG Leave Undirected Votes Adrift

Just before year end, the Department of Labor finalized its new rules on ESG investing and voting for retirement and pension funds.  The rules sharply restrict the ability of the fiduciaries of retirement and pension funds to make investments based on ESG factors or to vote shares held by such funds in favor of ESG issues.  The rules are unlikely to prove popular with the Biden administration, but regardless of how long they survive, the rules currently apply to trillions of dollars of investments and raise interesting questions about who will ultimately control the placement of a huge amount of … Read more

Key Governance Take-Aways from the Association of Corporate Counsel Chief Legal Officer Survey

The newly released Chief Legal Officers Survey (“Survey”) from the Association of Corporate Counsel (“ACC”)[1] is an important governance resource on s board’s responsibility to exercise oversight of a company’s legal affairs in general and the operation of its legal department in particular. The Survey confirms the overall value of a CLO hierarchically positioned to both influence corporate strategy and support the role of corporate governance.

The Survey offers a number of helpful perspectives on the interaction between legal and business matters. In that regard, the Survey data help inform the board on organizational structure and the role and … Read more

Lifting Labor’s Voice: A Principled Path Toward Greater Worker Voice and Power Within Corporate Governance

Many public policymakers and economists believe that American workers’ sharply declining share of corporate profits over the past few decades has been a major cause of increasing income inequality in the United States.  To some, the explanation for this profound change in the division of the corporate pie is simple.  Since the 1980s, the power of stockholders to demand corporate policies favoring their interests has drastically increased, while the leverage of working people in the corporate power structure has drastically decreased.  As a result, stockholders have grabbed much more of the pie, and left workers with crumbs.

Leading public officials … Read more

What Do the Data Reveal About (the Absence of Black) Financial Regulators?

As has been remarked many times, yet still never enough, Black history is America’s history – and if anything, financial regulation proves the point.   When calamity hits the stock market, Black people feel it too, if not always in terms of lost savings, then certainly in terms of lost jobs when firms resort to layoffs.  When charlatans peddle dangerous or risky financial products, whether stocks or mortgages, they tend to do so in our communities first. When rules are written concerning how and under what conditions individuals can access credit, or the obligations financial institutions have to their communities, we, … Read more

How the Litigious Bird Caught the (Banque) Worm

The transactional plumbing of corporate debt payment systems is hardly where one expects to find watershed legal moments; and it usually lives up to that mundane reputation. But every so often, real disputes emerge, and they are often doozies. Such was the case with a $1.8 billion loan facility that Revlon Inc. entered into with a syndicate of lenders half a decade ago. This particular loan, in fact, had the honor of being embroiled in controversy not once, but twice within a single year. And the second of these imbroglios seems destined to cast a long shadow on the law, … Read more

Davis Polk Discusses SEC No-Action Statement on Custody of Digital Asset Securities

A recent SEC conditional no-action position (the “No-Action Statement”) has further opened the regulatory door to trading of digital asset securities (“DAS”), by allowing certain limited purpose DAS-only broker-dealers to maintain custody of these securities on behalf of customers.  As firms have sought to develop trading systems for DAS, questions regarding whether or how broker-dealers could custody these securities for customers in compliance with SEC rules has been one of the primary regulatory hurdles.  Efforts to meet the SEC staff’s prior guidance that broker-dealers generally could not custody DAS for customers triggered somewhat cumbersome workaround attempts.  … Read more

Private Company Lies

Rule 10b-5, the federal antifraud catch-all, applies to both public and private company securities. Yet the voluminous case law, and the related scholarly literature, has focused primarily on public corporations and markets.

This state of the world sufficed for a time. Most corporations of significant size had publicly-traded stock and faced the threat of securities class actions. By contrast, private corporations generally issued stock through private placements to sophisticated investors, and there was little secondary trading in their stock. Startups typically were acquired or went public within a few years, and valuations did not surpass, or even approach, the … Read more

Gibson Dunn Offers 2020 Year-End Securities Litigation Update

Notwithstanding the ongoing spread of COVID-19 and unprecedented changes in daily life and the economy, the second half of 2020 marched on to the steady drumbeat of securities-related lawsuits we have observed in recent years, including securities class and stockholder derivative actions, insider trading lawsuits, and government enforcement actions. In this 2020 year-end edition of our semi-annual publication, we discuss developments in the securities laws that have occurred against this backdrop.

The year-end update highlights what you most need to know in securities litigation developments and trends for the second half of 2020:

  • Federal securities filings decreased by approximately 22%

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Shareholder Monitoring and Discretionary Disclosure

Regulation Fair Disclosure (“Reg FD”) is commonly believed to prohibit managers from disclosing information about their firm to select shareholders. But managers are in fact allowed to do so in several circumstances. Specifically, Reg FD exempts communications to shareholders who will not trade on the information and to companies’ customers, suppliers, and strategic partners. In a new article, we exploit an understudied setting where large shareholders and firms enter into bilateral contracts that entitle the shareholders to receive specific information privately from management. We find that, after the execution of such contracts, firm performance improves and the amount of public … Read more

Skadden Discusses FTC Moratorium on Early Terminations of HSR Waiting Periods

On Thursday, February 4, 2021, the Federal Trade Commission (FTC), with the concurrence of the Department of Justice’s Antitrust Division (DOJ), announced that it had suspended the process by which requests for early termination of Hart-Scott-Rodino Act (HSR Act) waiting periods are granted, potentially signaling a more aggressive approach to merger review.

Key Takeaways

  • For the foreseeable future, filing parties must in all cases wait for the full 30-day waiting period to expire before closing.
  • The rule applies to currently filed transactions and to any new filings.
  • The shift in practice by the FTC and the DOJ may preview a

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Why Some Covid-19 Mitigation Strategies Fail

As the Covid-19 pandemic continues to disrupt the global economy, regulators are struggling to find cost-effective mitigation strategies. The goal of such strategies should be simple: Reduce the spread of the virus, while causing the least amount of damage to people’s everyday lives, including economic activity. Yet, the diverse measures taken by governments only seem to have limited success in achieving that goal. Given that current estimates of the economic damage are tens of trillions of dollars, figuring out why some Covid-19 mitigation strategies still fail should be a top priority. In a new paper, we attempt to do exactly … Read more

King & Spalding Discusses Takeaways from GameStop

The recent meteoric rise (and subsequent fall) of GameStop, AMC Theaters and a host of other “meme stocks” has prompted hedge funds, investment bankers, regulators and public company executives to critically re-examine their preparedness for extraordinary market volatility.

The meme stock phenomenon is unique in numerous respects that have been well documented.  What has drawn less attention, however, is the fact that the phenomenon highlights how other “mid-cap” companies could become the next meme stock – or be subject to highly volatile stock price movements that may not be identical to what transpired at GameStop and AMC, but are dramatic … Read more

The Duty of Care for Board Members Should Include Competence in ESG

It is becoming clearer to investors and corporate managers that material environmental, social, and corporate governance (ESG) issues need to be managed as part of an organization’s business strategy.   Climate change, racism, economic inequality, water scarcity, cybersecurity threats – these are just a few of the material ESG issues posing risk and opportunity.

Unfortunately, our research finds that board members may not be up to the task.  We analyzed the credentials of each of the 1,188 Fortune 100 board directors based on Bloomberg and company biographies in 2018 and found that 29 percent had credentials (such as board memberships and … Read more

Skadden Discusses “The Year of the SPAC”

Transactions by special purpose acquisition companies, or SPACs, exploded in 2020, resulting in a 320% increase in the number of SPAC initial public offerings (IPOs) compared to 2019. SPACs have been around for 15 years and now are established as a legitimate alternative to a traditional merger or IPO. This is due in part to an evolution of the SPAC vehicle, which now offers enhanced investor protections and positions sophisticated managers as “sponsor teams” that guide the company through both the SPAC IPO and the de-SPAC process, as further described below. SPAC prevalence is set to continue through 2021, with … Read more

How Stricter Disclosure Rules for Private Meetings Affect Stock Price Informativeness and Volatility

Private meetings between management and investors occur worldwide and are generally held at corporate headquarters with invited investors and sell-side analysts (a.k.a., site visits).  Ng and Troianovski (WSJ, 2015) report that U.S. investors pay $1.4 billion a year to securities firms that can arrange face time with executives.  These meetings differ from other management-investor interactions such as investor conferences and analyst or investor days in that they are generally not publicized in advance and their content may never become public unless hosting firms are required to publish the meeting details by regulation.  Since 2009, the Shenzhen Stock Exchange (SZSE) in … Read more

The Myth of Dual Class Shares: Lessons from Asia

Companies with dual class shares have, as the term suggests, two (or more) classes of common stock. One class gives its holders voting power proportionate to their equity shareholdings. The other offers a group of shareholders, normally corporate insiders, weighted voting rights, which allow the insiders to retain control with less than majority ownership of the company.

The recent wave of high-profile technology giants, from Google to Facebook, that have gone public with dual class shares in the U.S. has led to the revival of the use of such share structures. Dual class shares have also gained traction among policymakers … Read more

Acting FTC Chair Slaughter Speaks on Protecting Privacy and Data Security

Thank you for inviting me to speak with you all today. The President named me as Acting Chair just a few weeks ago, and I’m incredibly excited about the opportunity to lead the FTC in these challenging times. It is fitting that one of my first speeches in this new capacity will be about privacy and data security, because these issues are so important to consumers, to the FTC, and to today’s information economy.

I want to direct my remarks today to some questions you may be asking—where is the FTC headed? What’s new and different at the FTC under … Read more

How Regulatory Stress Tests Affect Bank Lending

The Dodd-Frank Act, enacted in 2010 in the wake of the Great Recession, introduced mandatory stress-testing for the largest U.S. banks. Dodd-Frank Act Stress Testing (DFAST) was intended to ensure that banks have sufficient capitalization to absorb the losses they may experience in an economic downturn and, more importantly, continue providing credit to the economy. The stress-testing exercise, which is conducted by the Federal Reserve, uses hypothetical macroeconomic scenarios to predict a bank’s portfolio return under stress and its implied equity values. Thus, the exercise indicates whether a bank, given its current equity position and portfolio allocation, could withstand a … Read more

Gibson Dunn Discusses EU Developments in Corporate Human Rights Due Diligence

The concept of mandatory corporate human rights due diligence is gaining momentum, both within Europe and on the international stage

In this two-part alert, we examine key global legislative developments and proposals on this important topic. In Part One, we look at very recent steps taken by the institutions of the EU towards implementation of legislation at a pan-European level. In Part Two, we will consider developments at a national level within the EU and also look beyond Europe as we discuss the position in APAC, the US and Canada.

Mandatory Corporate Human Rights Due Diligence: EU Developments

What exactly … Read more

The Voting Premium of Stock

Holders of large blocks of a company’s shares are pervasive in developed economies. La Porta et al. (1999) find that only 17 percent of large firms in countries with strong shareholder protection qualify as widely-held, and Holderness (2009) shows that 96 percent of large U.S. firms have blockholders who own at least 5 percent of a company’s stock. Blockholders  influence corporate policies in many ways, with voting being arguably the most important, as it empowers shareholders to elect directors, approve major corporate transactions, and decide on governance issues. Since voting rights and dividend rights are bundled together in shares, blockholders’ … Read more

King & Spalding Discusses SEC’s Potential Focus During Biden Administration

For the next several weeks and months, intense focus will be trained on determining the priorities of the Biden administration. We believe that at the Securities and Exchange Commission (“SEC”), the new administration will ramp up examinations and investigations of investment advisers, and specifically advisers to private funds.

The industry has certainly been in growth mode. By the SEC’s own calculations, the number of private funds increased by nearly one third during the past four years (from 26,840 funds in the first quarter of 2016 to 34,858 in the first quarter of 2020), and the aggregate net asset value increased … Read more

The Duty to Disclose Inside Information: The Subtle Relationships Within the European Market Abuse Regulation

In our recent paper we discuss the European regime governing the disclosure of inside information. In particular, we try to find an answer to the question of which duties of the disclosure regime have been violated in two situations: where i) inside information is selectively disclosed to third parties and ii) the confidential nature of the inside information is no longer ensured if the disclosure of that information has been delayed. The requirements of the public disclosure of inside information are set out in Article 17 of the Market Abuse Regulation (MAR).[1] The issuer’s primary duty to disclose inside … Read more

Goodwin Procter Discusses CFIUS Process for “Non-Notified Transactions”

Much has been reported in the media about the efforts of the Committee on Foreign Investment in the United States (CFIUS) to investigate — and, where appropriate, mitigate, or even divest — transactions that the parties did not submit to CFIUS for review before they were consummated (so-called “non-notified transactions”). A recent Wall Street Journal article called attention to this worrisome trend, noting the Committee’s growing sophistication, enhanced funding for this outreach, appetite for investigating years-old investments, and leveraging of both the intelligence community and publicly available resources.

Although CFIUS outreach has long been a risk factor for the investment … Read more

The Lost Lessons of Shareholder Derivative Suits

Many corporate law scholars watched in amazement as merger litigation exploded over the past 15 years.  In 2005, only 37 percent of mergers involving U.S. public companies and with a transaction size of at least $100 million were challenged in court.  Today, approximately 85 percent of such mergers are challenged in court.  And these suits look different from the merger suits of the past. Instead of money, for example, shareholders today typically receive additional disclosures about the merger that have little value.  Instead of being filed in Delaware and other state courts, more cases are brought in federal court.  And … Read more

Wachtell Lipton Discusses White-Collar and Regulatory Enforcement: What Mattered in 2020 and What to Expect in 2021

As we write this memorandum, a new administration is forming in Washington, with new leadership teams being nominated at DOJ, SEC, CFTC and other regulatory and law-enforcement agencies — thus prompting the question of what these changes may portend for white-collar and regulatory enforcement priorities, trends and policies.  Having watched many administrations come and go over the years, our sense is that, in this area at least, continuity tends to prevail over disruption.  That said, we can offer the following educated guesses on what to expect going forward:

  • At DOJ, it is highly likely that the basic framework governing charging

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Why Would Passive Funds Invest in Corporate Governance?

The Big Three passive fund managers (BlackRock, State Street, and Vanguard) have roughly quadrupled their collective ownership stake in S&P 500 companies over the past two decades (Hirst and Bebchuk, 2019). This enormous increase in ownership by passively managed funds raises questions regarding the corporate governance of firms because it is unclear to what extent passively managed funds have the incentives to monitor their portfolio firms. Reduced monitoring and oversight in aggregate can open the door to executive entrenchment, inefficient corporate investments, and inattention to long-term risks.

Passive funds primarily compete on both price and performance with other … Read more

Cahill Gordon Discusses SEC Action Against Cheesecake Factory for Misleading COVID-19 Disclosures

On December 4, 2020, the Securities and Exchange Commission announced that it had settled charges against The Cheesecake Factory for making material misstatements concerning the impact of COVID-19 on its business operations and financial condition.[1]  The settlement resolved charges pursuant to Section 13(a) of the Securities Exchange Act of 1934 and Rules 13a-11 and 12b-20 thereunder concerning statements that The Cheesecake Factory had made in press releases attached to Current Reports on Form 8-K dated March 23 and April 3, 2020.  Of particular concern to the SEC were statements by The Cheesecake Factory that its restaurants were “operating sustainably” … Read more

Game Over: How Best to Regulate Betting on Wall Street

What a difference a week makes! Almost two weeks ago, the frenzied discussion of GameStop assumed that a proletarian revolution was in progress, that the masses had organized themselves through Reddit and Robinhood, and that they were marching on the bastions of the evil short sellers, who had long held these serfs in subjugation. “Investors of the World Unite! You have nothing to lose but your chains,” proclaimed the zealots on WallStreetBets. A week later, it was clear that the revolution had failed. GameStop had fallen from well over $400 a share to the low $60s on Thursday — much … Read more

Orrick Discusses SEC’s Recent Whistleblower Program Amendments

On January 13, 2021, prominent whistleblower attorney and a principal architect of the Dodd-Frank Act whistleblower program, Jordan A. Thomas, filed a complaint against the U.S. Securities and Exchange Commission (“SEC” or “Commission”) seeking a declaratory judgment that certain provisions of the SEC’s recent whistleblower program amendments are invalid and cannot be enforced. Specifically, the complaint challenges the SEC’s “clarification” of its authority to limit the size and number of certain whistleblower awards.

Under Dodd-Frank, the Commission pays a monetary award to a whistleblower that provides information to the SEC that leads to an enforcement action in an amount … Read more

States Should Still Be Prepared to Borrow

The pandemic has blown huge holes in most state budgets.  Now, with the advent of the Biden Administration and a Democratic Congress, there is a reasonable chance that substantial federal aid is coming – finally.

Given this turn of events, states may conclude that it no longer makes sense to borrow to handle budget shortfalls.  This would be a mistake.  The new round of relief has not yet passed, and it is unclear whether it will be sufficient either in general or as to particular states.  It is also unclear whether it will be enough as the crisis unfoldsRead more

Latham & Watkins Looks Back at Digital Asset Regulation in 2020

Last year, Latham & Watkins sounded a hopeful note that 2020 would provide a clearer vision than 2019 for the regulation of digital assets in the US. In the wake of the emergence of COVID-19, priorities changed, along with forecasts and expectations. The second and third quarters of 2020 had regulators of all stripes in triage mode, and any attention they may have directed at cryptoassets was understandably shelved. On the other hand, far from sidelining digital asset growth, the pandemic appears to have spurred further innovation and adoption. Regulators are now continuing to reckon with an asset class that … Read more

Lessons from India’s Struggles with Corporate Purpose

The escalating debate over corporate purpose is not confined to developed economies in the West. Rapidly developing economies in nations like India are similarly grappling with how to define and develop a legal framework around corporate purpose. Corporate social responsibility (CSR) and a re-examination of corporate purpose have been at the centerpiece of discussions about corporate governance reforms in India. In a new book chapter, I discuss the lessons that can be learned from India’s experience with corporate purpose.

For over a decade, India has taken a multi-pronged approach toward redefining corporate purpose. Voluntary guidelines issued by the Indian Ministry … Read more

Wachtell Lipton Discusses M&A Activity in 2020 and Expectations for 2021

Deal activity (or inactivity) for much of 2020 was driven first by the unprecedented uncertainty and massive global shutdown of the early days of the Covid-19 pandemic, and then propelled by rising markets and confidence as animal spirits anticipated the light at the end of the tunnel, even against a backdrop of political instability and record levels of infection and death.  Indeed, for M&A, 2020 was a tale of two halves:  the second lowest first-half global M&A volume in the last decade (approximately $1.2 trillion), followed by a 90% increase in the last six months (to approximately $2.4 trillion), for … Read more

The Financialization of Corporate Governance

Members of the academic community, the business world, and law firms have long been debating shareholder primacy, stakeholder governance, and corporate purpose. In a forthcoming essay, I outline these arguments but suggest that reform of corporate governance should be focused on executive compensation and compelling fiduciaries subject to ERISA and other legal regimes to protect retirement savings. In my opinion, the financialization of corporate governance fomented by activist investors that led to compensating executives with equity is the primary cause of the dissatisfaction with corporate performance by non-shareholder constituencies.

My essay traces the development of the financialization of corporate governance … Read more

Paul Hastings Discusses Integrating Human Rights and ESG into International Regulatory Compliance

As we wrote toward the end of 2020, the risks associated with business and human rights, and ESG more generally, have led a growing number of companies to create human rights/ESG management systems or to integrate human rights/ESG into existing compliance programs.  Relying on the UN Guiding Principles on Business and Human Rights (“UNGPs”), we listed six core elements of human rights/ESG compliance programs – which are generally part of effective international regulatory compliance programs.  We promised to provide detailed posts regarding each individual element where we will discuss the key components of that element and how its presence in … Read more

Why Judges Need to Speak Out About Problems in the Administration of Justice

The Code of Conduct for United States Judges affirmatively encourages federal judges to engage in those extrajudicial activities, such as writing articles, that are intended to help improve the administration of law.  But for most of my first two decades on the bench, I largely avoided this recommendation, partly because, like most judges, I was very busy conducting the business of my court, and partly because, like many judges, I took a certain perverse pleasure in remaining aloof.  But finally the very disturbing tendencies that I observed enveloping the American system of justice got to me, and I felt the … Read more

Fried Frank Discusses U.S. Treasury’s Carried Interest Regulations

Section 1061 of the Internal Revenue Code was enacted as part of the 2017 Tax Cuts and Jobs Act to create greater parity between the tax treatment of ordinary income and capital gains attributable to carried interest. The basic statutory framework applies by recharacterizing certain long-term capital gain (“LTCG”) as short-term capital gain (“STCG”), unless either an extended holding period is satisfied (three years, as compared to one year) or an exception applies. In August, 2020, the Treasury Department and the IRS issued proposed regulations (the “Proposed Regulations”) interpreting Section 1061, which were complex and restrictive in many respects, and … Read more

A Reddit Rebellion in the Robinhood Era

For over a decade, hedge funds and other sophisticated traders have taken advantage of ordinary Americans who sought to share in the rewards of entrepreneurship and economic growth by investing in public companies.  My research has identified tens of billions of dollars of transitory price crashes from short attacks aimed at retail investors on social media.  Until last week, it appeared that GameStop was on its way to becoming yet another target of the activist short-selling machine.  This was the week that investors decided to fight back.

“Negative activist” hedge funds mastered the art of driving down share prices via … Read more

Goodwin Procter Discusses “Constructive Awareness” of Processor Data Breaches Under the GDPR

On December 15, 2020, Ireland’s Data Protection Commission (“DPC”) announced its decision to fine Twitter International Company (“Twitter”) €450,000 for failing to notify the DPC promptly of a data breach affecting EU personal data in compliance with the EU General Data Protection Regulation (“GDPR”). The decision received all the press coverage that is to be expected for any decision involving Big Tech and was the largest GDPR fine issued by the DPC to date. However, the significance of the decision really lies in the message that Controllers cannot escape their breach notification obligations due to failures on the part of … Read more

Addressing ESG in 2021: Who Is in Charge?

Over the course of 2020, market forces drove corporations and institutional investors to make expansive commitments to their purpose and social responsibility. This fueled companies in many regions to publish lengthy reports under the ESG moniker (Environmental, Social and Governance). The volume of individual company disclosures will almost certainly increase dramatically in 2021. Will the quality of disclosures improve? How should these disclosures be integrated into the presentation of fundamental business performance?

In the U.S., the Securities and Exchange Commission has been noticeably absent from the intensifying public debates on the E and the S of ESG. It already addresses … Read more

Latham & Watkins Discusses Digital Asset Regulations of 2020

Last year, Latham & Watkins sounded a hopeful note that 2020 would provide a clearer vision than 2019 for the regulation of digital assets in the US. In the wake of the emergence of COVID-19, priorities changed, along with forecasts and expectations. The second and third quarters of 2020 had regulators of all stripes in triage mode, and any attention they may have directed at cryptoassets was understandably shelved. On the other hand, far from sidelining digital asset growth, the pandemic appears to have spurred further innovation and adoption. Regulators are now continuing to reckon with an asset class that … Read more

How Scrutinizing Honest Managers Encourages Earnings Management

Research in finance and accounting consistently documents that a significant number of managers overstate reported earnings when true earnings miss a benchmark [1]. Managers face strong incentives to meet and beat important earnings thresholds, such as the analyst consensus forecast of a corporation’s next period future earnings per share (EPS), because capital markets react negatively to firms falling short of earnings expectations [2]. Hence, there is a widespread belief that managers “cook the books” in order to meet these benchmarks.

The accounting and corporate governance literature offers at least two ways to curb earnings management: carefully scrutinizing managers [3] and … Read more

Sidley Austin Discusses Delaware Chancery’s Latest Guidance on Caremark Claims

The Delaware Court of Chancery provided its latest guidance on so-called Caremark claims in a New Year’s Eve opinion issued by Vice Chancellor Glasscock in Richardson v. Clark, an action brought derivatively by a stockholder of Moneygram International, Inc. The opinion dismissing the claims, in which the Court had some fun with film titles from Tom Cruise’s career, provides an important level-setting because some have questioned whether Delaware’s courts are lowering the bar for claims alleging that a board of directors failed in its oversight duties. Richardson should provide some comfort to directors that the standards have not changed: … Read more

How Principal Reduction Through Mortgage “Cramdown” Affects Household Distress

The U.S. experienced an unprecedented number of home foreclosures during the Great Recession of 2007-2009. To limit defaults and deadweight losses, the government implemented various policies that reduced monthly payments by homeowners (i.e., Home Affordable Modification Program) and facilitated mortgage refinancing (i.e., Home Affordable Refinancing Program). These initiatives had modest success. An alternative policy proposal that was not implemented during the Great Recession would have allowed mortgage “cramdown” by judges as part of the Chapter 13 bankruptcy process. The proposal passed the House of Representatives but failed in the Senate. In these restructurings, the underwater portion of the mortgage is … Read more

Latham & Watkins Discusses UK’s Enhanced Climate-Related Disclosures for Listed Companies

On December 21, 2020, the UK Financial Conduct Authority (FCA) confirmed in a published Policy Statement[1] (the Statement) that it will introduce a new Listing Rule (the Rule) requiring premium listed companies to state whether they have made disclosures pursuant to the Climate-related Financial Disclosures (TCFD) recommendations, and if not, why.

The Rule comes in response to the FCA’s March 2020 Consultation Paper, under which the FCA sought to enhance climate-related disclosures by listed issuers and to clarify existing disclosure obligations. The Rule is also a forerunner to the UK’s plan to fully align corporate disclosure with the Read more

The Causes and Consequences of Increased Cross-border Shareholder Activism

In a recent working paper, we look at what drives shareholder activism around the world and focus specifically on the role of corporate governance reforms.

Overview

While shareholder activism has been a force in U.S. capital markets for some time, the last decade has seen an explosion in activism globally, including in countries where activists have previously had little influence.  Our research explores what explains this growth and focuses specifically on the role of changes in regulations and laws that facilitate activism. We develop a country-level framework of regulatory characteristics that serve as necessary precursors for minority shareholders to influence … Read more

Debevoise & Plimpton Discusses UK’s Autonomous Sanctions Regime

At 11pm on December 31, 2020, the Brexit transitional period ended and the UK’s autonomous sanctions regime, consisting of approximately 30 regulations, came into force. It is largely based on the EU’s sanctions legislation that was previously implemented in the UK, but there are important differences.

Companies operating in the UK will need to ensure that their sanctions systems and controls reflect this sanctions legislation. Companies will also need to consider if these changes could affect existing contractual relationships and their approach to sanctions-related representations and warranties in the future.

UK Sanctions Legislation

The UK’s Sanctions and Money Laundering Act Read more

The Backlash Against Chinese-Company Listings on U.S. Exchanges Has a Long History

The reach of American law has recently entered familiar territory: listings of international companies on U.S. exchanges. Yet the listings of Chinese companies have in particular prompted a backlash. I want to shed some light on the situation – and outline U.S. government responses to Chinese listings – given my experience bringing Chinese companies to the New York Stock Exchange (NYSE) as its group executive vice president from 1996 to 2003.

The Listings Wave

During that period, listings of foreign companies improved their transparency and governance, thanks to the listing standards of the exchanges and Securities and Exchange Commission, and … Read more

Paul Hastings Discusses Proposed Cyber Incident Reporting Rule for Banks

Federal financial regulatory agencies, including the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (“FDIC”), and the Office of the Comptroller of the Currency (“OCC”) (collectively, the “Regulators”), issued on December 18, 2020, a Notice of Proposed Rulemaking titled “Computer-Security Incident Notification Requirements for Banking Organizations and Their Bank Service Providers.”

Existing financial services (GLBA) regulatory guidance already requires supervised banking organizations to notify their primary federal regulators “as soon as possible” if they become aware of an incident involving unauthorized access to, or use of, sensitive customer information. However the existing requirements … Read more

How Material Are Disclosures in Annual Reports?

The Financial Accounting Standards Board (FASB) and the Securities Exchange Commission (SEC) (collectively, “regulators”) have expressed concern over “disclosure overload,” or the concern that the sheer volume of disclosure in annual reports makes it difficult for investors to identify and incorporate relevant information into their decisions (White 2013). While academic research finds that annual reports have become longer and less readable (e.g., Dyer et al. 2017), regulators attribute disclosure overload in part to high levels of immaterial disclosure that make it difficult for investors to recognize the material, or relevant, information in these reports.

Interestingly, firms are not required to … Read more

Wilson Sonsini Discusses DOJ’s “No Poach” and “Wage-Fixing” Antitrust Prosecutions

The U.S. Department of Justice’s Antitrust Division (DOJ) has made good on a promise it made over four years ago to criminally charge companies that agree not to solicit each other’s employees in so-called “no poach” agreements or that agree not to compete on wages or salaries in so-called “wage-fixing” agreements. In the waning days of the Obama administration, the DOJ announced it would begin criminally prosecuting collusive conduct affecting labor markets;[1] now, in the waning days of the Trump administration, the DOJ has followed through.

On January 5, 2021, a federal grand jury returned a two-count indictment charging … Read more

The Case for Prudential Regulation of the Litigation Finance Market       

[Editor’s Note: This and the piece that immediately follows offer a point/counterpoint on litigation finance.] The past decade has witnessed a steady stream of innovative capital markets products.   Among these developments is litigation finance – a transaction form where a non-party to a dispute provides capital to finance a litigation.  Litigation finance seeks efficiently to transfer the financial risk of litigation from those who cannot (or do not wish to) bear it, to capital providers  who seek to profit from voluntary exposure to the risk.  But, like many other financial products, litigation finance also carries nonfinancial risks that … Read more