For over two decades, the federal government has employed roughly the same approach to corporate crime. Prosecutors promise leniency in exchange for corporations’ commitment to improve the internal structures and systems that ensure their employees’ compliance with law. Over the years, this leniency-for-compliance framework has generated not only a sophisticated and robust compliance industry, but also a proliferation of enforcement policies designed to improve corporate policing and disclosure.
The framework has also generated two sub-fields of scholarship. One examines the dynamics of corporate enforcement, whereas the other studies the corporation’s compliance function. Two recent papers of mine seek to further … Read more
A series of recent papers (here, here, and here, for example) have argued that maximizing shareholder value remains the proper goal of the modern corporation – and in some cases that stakeholderism is in fact harmful to stakeholders. Yet giving up on stakeholderism for the sake of stakeholders cannot be the right answer or strategy, even though there are significant challenges to steering away from the currently prevailing framework.
Although the papers differ in the details of their arguments, they share some common themes:
- Corporate managers do not and will not use discretion to benefit non-shareholder
… Read more
As the COVID-19 pandemic causes commercial and financial difficulties, many businesses will be considering M&A to address strategic issues, take advantage of market opportunities, and, in some cases, ensure their survival. This memorandum considers the merger control implications of the pandemic for businesses contemplating transactions at this time.
First, this memorandum provides an overview of how European agencies are responding to the pandemic. Second, it considers how the crisis may affect the substantive assessment of transactions, including the implications of changed competitive conditions, the availability of the “failing firm” defense, and agencies’ evaluation of the counterfactual. Finally, we provide some … Read more
Most securities fraud class actions under SEC Rule 10b-5 involve revelation of negative information about the defendant company that should have been disclosed earlier – bad news that (allegedly) has been covered up by company agents. The standard remedy in such cases is out-of-pocket damages (OOPs). But this measure of harm is inherently ambiguous. Some courts interpret it as price inflation at the time of purchase. Others interpret it as the difference between the price paid and the price at which a stock settles after corrective disclosure.
Although it might seem that these formulations are synonymous, the latter … Read more
The Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, which was signed into law on March 27, 2020, provided for the establishment and expansion of a range of economic assistance programs designed to help U.S. businesses manage the financial consequences of the ongoing COVID-19 crisis. While these programs may provide a much-needed lifeline to U.S. businesses, the CARES Act also created oversight and enforcement functions, which, along with existing authorities, raise enforcement risks for businesses that choose to participate in the act’s programs. The CARES Act has already been the subject of intense scrutiny, particularly with respect … Read more
The Securities and Exchange Commission (SEC) regularly reviews financial filings to ensure compliance with accounting standards and other disclosure requirements. The SEC review team analyzes firm’s financial filings and asks questions (in a comment letter) about perceived deficiencies. A comment letter may request clarification regarding an accounting or reporting issue and may ask a firm to revise or update its financial reports. According to the SEC, this comment process “deters fraud and facilitates investor access to information.”
Comment letters are publicly available on EDGAR, and both accounting and law firms monitor comment letters to ascertain where the SEC is directing … Read more
COVID-19 had a marked impact on M&A in April, extending the decline observed in March across all measures. Globally, the number of deals decreased by 24.2%, to 2,036, and total deal value decreased by 44.3%, to $118.34 billion. U.S. M&A activity also declined, with the number of deals decreasing by 32.2%, to 473, and total deal value significantly decreasing by 69.6%, to $16.60 billion. Significantly, average deal value declined to $58.1 million globally and to $35.1 million in the U.S. (reductions of 26.5% and 55.1%, respectively). Figure 1.
In a marked departure from the norm, no U.S. public … Read more
Fifty years ago this year, Milton Friedman, later to be a Nobel laureate in economics, famously argued that corporate governance should focus solely on shareholder value maximization, while conforming to applicable laws and regulations. That view was controversial then. After years of dominance as a governance idea, shareholder primacy is once again controversial. We argue that it is more or less still correct.
Recently, the Business Roundtable’s Statement on the Purpose of a Corporation commits the board to other stakeholders as well — including customers, employees, suppliers, and communities the company operates in. But importantly, if labor markets and product … Read more
Amid the turbulence in stock markets, retail investors continue to look for investment ideas. With thousands of publicly-traded stocks available, many retail investors often resort to their recent personal experiences when deciding on which stocks to buy or sell. Maybe a surge in video conferencing or home deliveries will prompt them to invest in companies involved in those businesses. They could even be inspired by ads they see on TV.
In a recent paper, we find a predictable, recurring, and robust pattern between investor exposure to television commercials and subsequent retail stock trading. We find that, within 15 minutes of … Read more
This Client Alert provides an update on shareholder activism activity involving NYSE- and Nasdaq-listed companies with equity market capitalizations in excess of $1 billion and below $100 billion (as of the last date of trading in 2019) during the second half of 2019. Announced shareholder activist activity declined relative to the second half of 2018. The number of public activist actions (24 vs. 40), activist investors taking actions (17 vs. 29) and companies targeted by such actions (23 vs. 34) each decreased substantially. The slowdown was in contrast to the first half of 2019, during which period shareholder activism activity … Read more
What makes a central bank “independent?” As most central bank scholars and policy-makers would likely answer that question, “it depends” – it depends on the bank, the function it is performing, and the political-economy of the times. Still, as complicated as the concept of central bank independence is, many experts could likely agree on at least one indicium of independence: a central bank’s legal freedom to make certain decisions free from executive branch interference – at least where certain of its core functions, like monetary policy, are concerned.
In a recent article, we compare the way that two different legal … Read more
The 2020 proxy season has been anything but routine, with the COVID-19 pandemic and the resulting state shelter-in-place orders requiring many companies to make the shift from physical to virtual annual meetings, and state corporate laws being amended to allow these virtual meetings to occur. Yet we had not seen a virtual annual meeting used in a proxy contest until April 30, 2020, when shareholders of TEGNA Inc. participated in the first election contest conducted at a virtual, rather than physical, annual meeting (all of the company’s twelve nominees were re-elected).
While the concept and technology have existed for several … Read more
The COVID-19 pandemic is causing financial distress to economically viable firms on an unprecedented scale. In this post, we introduce the novel idea of creditor cooperation duties to stabilize corporate workouts.
The prospect of widespread defaults by viable firms triggered by the COVID-19 pandemic has prompted emergency legislation around the globe. To a significant degree, these measures aim to keep distressed firms out of formal bankruptcy proceedings. For example, duties to initiate such proceedings have been suspended in Germany, Italy, and Spain; rules that govern the liability of directors of near-insolvent or insolvent companies have been relaxed in Australia, Singapore, … Read more
Since Google (now Alphabet) issued dual-class stock at its IPO in 2004, the subject has been vigorously debated throughout the world. Unlike firms whose shares all have equal voting rights (“one-share, one-vote firms”), companies with dual-class stock allow a founder to attach enhanced voting rights to the shares that he or she holds, while issuing shares with inferior voting rights to public stockholders. All classes of such stock possess equal rights to share in the cash-flow of the corporation, thereby creating a divergence in voting and cash-flow rights in the capital structure of the company. Dual-class stock therefore enables a … Read more
On May 8, 2020, the Commission published an important new communication aimed at relaxing State aid rules for COVID‑19‑related equity injections by States into non‑financial companies. While previous initiatives aimed at relaxing State aid rules (in particular the so‑called “Temporary Framework”, or “TF”, adopted on March 19, 2020)  were focused on maintaining companies’ access to liquidity, this new communication recognizes that the economic effects of COVID‑19 will also endanger their solvency and thus require more structural (and potentially competition‑distortive) measures such as equity or hybrid capital injections or subordinated loans (i.e., debt instruments that are subordinated … Read more
In the middle decades of the 20th century, government officials broadened access to the courts, placing public law more at the center of traditionally private disputes. They professionalized and regularized criminal justice, which previously had been a somewhat, if not significantly, privatized domain. They expanded and intensified industrial and financial regulation and enacted laws and rules to structure and discipline myriad commercial transactions and relationships. They assumed greater responsibility for funding and directing major infrastructure projects. And, to pay for all of this, they imposed steep and relatively progressive taxes.
By the last decades of the 20th century, critics expressing … Read more
The Small Business Administration (“SBA”), in consultation with the Treasury Department, issued FAQ #43 on May 5, 2020 extending by a week the time within which a borrower has to repay a previously issued SBA loan under the Paycheck Protection Program (“PPP”) in order to take advantage of a presumption that a borrower certified necessity for the loan in good faith at the time of the loan application. This memo updates Cadwalader’s recent Clients & Friends Memo that provided the guidance below outlining criteria that a borrower should consider in deciding whether to return … Read more
For nearly 90 years, scholars have debated whether the sole purpose of the business corporation is to maximize profits. This debate has been reframed over the past 50 years and now seems to have settled on a middle ground: Corporate social responsibility (CSR) and profitability can coexist as corporate goals. The question, though, is what is the appropriate balance between the two?
In a new article, available here, I explore the role of state corporate law and federal securities law in answering that question. So far, the Securities and Exchange Commission and the courts have made only limited progress … Read more
The coronavirus (COVID-19) pandemic and the ensuing market uncertainty, as well as recently enacted legislation, have upended the compensation and benefit programs of many companies. This is the fifth memorandum in a series of client memoranda that we are preparing regarding how companies may wish to consider addressing their compensation programs in this context.
The recent market volatility has disrupted many companies’ day-to-day operations resulting in economic hardship that has caused companies to consider or implement various measures to reduce personnel costs, including pay cuts, furloughs and/or layoffs. When implementing such personnel cost-cutting measures, a number of companies have … Read more
Following news reports about executives selling shares in their corporations to avoid losses due to the pandemic, we take a closer look at insider trades and find that net insider purchases have been positive in February and March, revealing corporate optimism, not pessimism. Our findings are a reminder that not all burning questions about the impact of the pandemic can or should be answered right now.
Accurate answers rely on good data, but good data are hard to come by. One reason is that we are measuring some things for the first time, such as the true death toll of … Read more
Good afternoon. This is an open meeting of the U.S. Securities and Exchange Commission on May 6, 2020, under the Government in the Sunshine Act. The Commission today will consider a staff recommendation to issue an Order that would direct the registered equities exchanges and the Financial Industry Regulatory Authority (“FINRA”) to propose a new, single national market system (“NMS”) plan to govern the public dissemination of real-time, consolidated market data for NMS stocks.
Throughout my tenure as Chairman, I have discussed the need for the Commission to focus additional analytical resources on our ever evolving market structure. U.S.
… Read more
Delaware’s success in attracting corporate formations is well known, but explanations for it vary. In a recent paper, I test these explanations as well as the reasons for Delaware’s success in attracting other types of business formation I find evidence consistent with Delaware’s making a credible commitment to creating quality corporate law, particularly through its judiciary, and this commitment extends to LLCs and other organizational forms. These results provide insight into why Delaware leads corporate formations, how that lead expands to related organizational forms, and how the future of state competition for organizational formations might unfold.
The Delaware saga of … Read more
As significant economic sectors grind to a halt around the world due to coronavirus-related lockdowns and travel restrictions, many portfolio companies will face liquidity crunches, raising concerns for private equity fund managers and their investors. Uncertainty around the duration and extent of coronavirus-related business interruptions presents a further challenge for sponsors trying to manage financing needs across their portfolio. In this hazardous environment, many sponsors are considering how to preserve financial flexibility for present and future needs, including:
- amending limitations on follow-on investments in the fund’s governing documents;
- amending recycling provisions in the fund’s governing documents to permit additional re-investment;
… Read more
These are exceptional times, and policymakers are taking exceptional measures in public health, public finance, monetary policy, and public law. Among the latter, of great relevance to corporate governance are the rules broadening governments’ powers to authorize large share block purchases (e.g., in Germany and Italy). Even stronger proposals are being aired, and in some cases adopted, to inject public funds into companies in exchange for equity (Germany), if not to nationalize businesses altogether (France).
But some incursions into private law have also been made. This is especially true with regard to insolvency (or bankruptcy) … Read more
The Covid-19 outbreak demonstrates how vulnerable our elaborate cross-border supply chains are to disruption. It isn’t the first time in recent memory that contemporary supply chains have been upended – the 2011 earthquake off the coast of eastern Japan is one of many examples. But Covid-19 has taken supply chain disruption to a new level of severity as well as scale. Failure is no longer measured solely in economic terms; rather, the unavailability of key inputs, from reagents to ventilator parts to personal protective equipment, means the difference between life and death.
How do we begin rebuilding our supply chains … Read more
Over the last two years, direct listings – in which companies list their stock on an exchange to enable insiders and early investors to sell their holdings to the public without issuing new shares – have received considerable attention as an alternative to traditional initial public offerings. Until now it has been assumed that claims under Section 11 of the Securities Act, which generally require plaintiffs to “trace” their purchases to a registration statement, would be difficult to pursue because many shares in a direct listing may be sold without using a registration statement.
On April 21, 2020, however, … Read more
In early 2020, State Street Global Advisors, BlackRock, and other investment firms announced their plans for persuading companies to address financially-material environmental, social, and governance (ESG) issues. The high-profile announcements followed moves in recent years by Wellington Management, CalPERS, and other institutional investors to integrate climate-related data into their processes and increase the pressure on companies to more deeply consider climate change risks and disclose how they are accounting for those risks in their operations. Companies have responded with a steady stream of climate-related goals, commitments to disclose in line with the Financial Stability Board’s Task-Force on Climate-Related Financial Disclosures … Read more
Companies recognize the importance of environmental and social (E&S) factors and are giving consideration to a broader group of stakeholders to help mitigate risk. However, new regulations bring uncertainty to the future of environmental, social and governance (ESG) proposals.
The rapid spread of the coronavirus is roiling global markets and testing companies’ abilities to handle such a significant crisis. While many aspects of the current outbreak are certainly beyond issuer control, strong company ESG management plays an important role in mitigating downside risk and preserving long-term value. Conversely, poor ESG management could lead to greater negative impacts and a longer … Read more
In the last two decades, the proxy advice market has consolidated into two companies that some believe control as much as 97 percent of that market, leaving little diversity in available advice. The companies, ISS and Glass Lewis, are opaque about the bases for their recommendations, and critics accuse them of offering simplistic one-size-fits-all solutions that do not increase shareholder value.  Complicating matters, investors don’t always agree on what sort of advice they want, especially when it comes to social issues: Traditional funds and socially responsible investors (SRI) disagree about whether firms should sacrifice profit for social goals. … Read more
One of the most significant corporate governance implications of the pandemic may be its impact on the role and function of a board’s enterprise risk committee. From one perspective, the pandemic may increase that committee’s significance, potentially putting it on a par with the audit committee. From a related perspective, it may prompt the board to contemplate how much oversight it expects from that committee.
The catalyst for such change is grounded in six interconnected factors: (i) the broad-based creation of board committees focused on enterprise risk management (ERM); (ii) the nature and scope of the pandemic; (iii) second guessing … Read more
Purpose is currently one of the hottest topics in corporate governance. Commentators are demanding not only that corporations formally articulate a purpose, but that the corporate purpose embrace the interests of non-shareholder stakeholders or society more generally. In August 2019, the Business Roundtable issued a new statement on the purpose of the corporation, which replaced its former support for shareholder primacy with the proposition that corporations be run “for the benefit of all stakeholders – customers, employees, suppliers, communities, and shareholders.” Shareholders have followed up, and several introduced shareholder proposals during the 2020 proxy season asking signatories of the … Read more
Upcoming first quarter earnings calls may be the most scrutinized in modern corporate history. How to handle these calls in light of the unprecedented social and economic impacts of COVID-19 is a question confronting every company that has not yet announced. Investors, the SEC and other stakeholders are clamoring for insight into what this extraordinary pandemic means for individual businesses, the private sector and the Nation at large. We believe that these upcoming earnings calls provide an opportunity for companies to show leadership and purpose by providing the critical insights that will help investors, analysts and other stakeholders grasp where … Read more
The Paycheck Protection Program (PPP) is a critical part of the CARES Act, which helps individuals and organizations ride out Covid-19’s initial damage to the U.S. economy. PPP provides for loans to small businesses, and Congress should focus on keeping money available and making it easier for small businesses without pre-existing bank relationships to get loans. (One way to do that would be to waive the anti-money-laundering rules and instruct bank regulators to create a comprehensive online list of lenders willing to make PPP loans to new clients).
Instead, the PPP is beset by controversy. Big restaurant chains like Ruth’s … Read more
The coronavirus pandemic has weakened European economies and companies. EU and national governments have expressed concern that foreign investors may opportunistically take advantage of the crisis to acquire domestic companies regarded as strategic.
Acquirers should anticipate the risk that governments may review and challenge acquisitions of companies perceived as strategic national assets. Potential for foreign investment review should be considered in advance, in terms of both current legislative measures and prospects for future political intervention, by means of, for example, committee inquiries by national legislatures, state defensive stake-building or even nationalisation of vulnerable domestic companies. These concerns can extend well … Read more
When it comes to responding to the coronavirus outbreak in the U.S., the Federal Reserve has emerged as one of the most active institutions at the national level. Its bold and timely interventions have halted a monetary breakdown that would have guaranteed a second Great Depression. And its continuing efforts to avert a vicious cycle of debt defaults are helping to address a sudden economic stop that has made a deep and lasting recession all but inevitable. Unfortunately, the Fed has repeatedly had to scramble and stretch its authority because it was not designed to address the current crisis. In … Read more
Against the backdrop of unexpected developments arising from the COVID-19 pandemic, parties with signed, but not yet closed, M&A transactions are taking a closer look at potential openings for claims of breaches and failures of closing conditions. It seems the initial instinct has been to look for a “material adverse effect” (“MAE”), but given that most MAE definitions exclude effects resulting from macro- and industry-wide developments, as well as changes in law, that do not disproportionately impact the target company, those looking to rely on pandemic-induced MAEs may have their work cut out for them.
We suspect that … Read more
Columbia Law School and Columbia Business School’s Program in the Law and Economics of Capital Markets is seeking a full-time Capital Markets Research Fellow. The appointment is anticipated to run from July 1, 2020, to June 30, 2022.
This position is for a person who expects to begin a law school teaching career at the start of the 2022-23 academic year and who desires an interim position that would help the person prepare for such a career by offering the time and facilities needed to do serious research and to develop further expertise. A candidate should have an exceptional academic … Read more
[Editor’s Note: This and the following piece offer a point/counterpoint on shareholder voting.] The SEC’s recently proposed rules on proxy advisers and shareholder proposals have made shareholder voting one of the most prominently debated corporate governance issues ever. In a new article, “The Risks and Rewards of Shareholder Voting,” I seek to shed more light on the role of shareholder voting in the governance of public companies.
Shareholders Are Notoriously Uninformed
Shareholder voting allows shareholders to participate in corporate decisions, but very few public company decisions are based on it. This is understandable, because shareholder voting suffers from a collective … Read more
Recent debates have sometimes obscured the value of shareholder voting, which the Council of Institutional Investors (CII) regards as a key element in the legitimacy and functioning of the corporate governance system in the United States and elsewhere.
A factor in confusion on this may be overstatement of supposed claims made by institutional investors generally for “shareholder democracy.” In a current paper, for example, Bernard Sharfman writes that “Shareholder voting provides a means by which shareholders can participate in corporate decision making.” However, he goes on to say, “very few public company decisions involve this decision-making mechanism.” Well, one … Read more
Almost everyone has experienced buyer’s remorse. It’s the feeling of purchasing, say, a big-screen TV at full price, only to see it on sale later for 50 percent off. Imagine, though, agreeing to pay $6 million for a chain of yoga studios just before the government shuts down exercise classes to slow the spread of a highly infectious disease. Or, more generally, agreeing to buy a company just before the stock market drops 30 percent, throwing the economic future of entire industries into turmoil.
That’s the kind of buyer’s remorse on steroids hitting scores of acquirers that committed to M&A … Read more
The Securities and Exchange Commission and its senior staff have put out a succession of releases that combine some relief, some guidance and some warnings. The SEC Coronavirus (COVID-19) Response page is available here.
The latest in the series came on Wednesday, April 8, in the form of a long, forceful public statement published on the SEC’s website by Jay Clayton, the SEC Chair, and Bill Hinman, the Director of the Division of Corporation Finance. It focused on upcoming corporate disclosures – with a particular view to first-quarter earnings releases of calendar-year companies – and it contained some helpful guidance … Read more
Generational identity can influence many aspects of life, from family and work to political views to consumer and corporate behavior. In the United States today, there are four adult generations: Millennials (born 1982 – 2005), Generation X (born 1961 – 1981), Baby Boomers (born 1943 – 1960), and the Silent Generation (born 1925 – 1942). Of these four, only one – the Baby Boomers – have a dominating presence in U.S. corporate boardrooms. While the Millennial and Silent generations may be too young and too old, respectively, to have meaningful representation on corporate boards, Gen Xers (between the ages … Read more