On November 14, 2022, FTX, the third largest crypto exchange in the world, filed for bankruptcy. Since then, the company, its many affiliates, and its 30-year-old owner and founder, Sam Bankman-Fried, have been investigated by lawmakers and regulators across many jurisdictions, including the Commodity Futures Trading Commission, the Securities and Exchange Commission, and the U.S. Attorney for the Southern District of New York. Early reports indicate that the company faces aggregate claims from creditors in the billions of dollars and has traditional, liquid assets that fall far short of meeting these liabilities.
The bankruptcy declaration reveals the … Read more
In April 2022, Assistant Attorney General Jonathan Kanter of the Department of Justice’s Antitrust Division (DOJ) previewed the DOJ’s intent to more aggressively enforce the prohibition on interlocking directorates under Section 8 of the Clayton Act, 15 U.S.C. § 19. During a speech to antitrust enforcers at an annual spring summit, AAG Kanter stated, “For too long, [DOJ] Section 8 enforcement has essentially been limited to our merger review process.” AAG Kanter indicated that, going forward, the DOJ would be “ramping up efforts to identify violations across the broader economy” and that it “will not hesitate to bring Section 8 … Read more
In a new paper, we use agency theory to explore the effect of board independence on dividend policy. Over the past few decades, many studies have incorporated several market imperfections into their model of capital markets, such as transaction costs, taxes, and shareholder heterogeneity. We focus on agency costs, which can be mitigated by effective governance mechanisms, such as a more independent board of directors.
In our study, we exploit as a quasi-natural experiment enactment of the Sarbanes-Oxley Act of 2002 (SOX) and the associated exchange listing requirement that public companies have a majority of independent directors.
Dividends serve as … Read more
While the world recovers from the worst of the pandemic, the economic, political and social repercussions will continue to play out in ways that, while unpredictable, are in some respects characterized by observable patterns of cause-and-effect and cyclicality. The pendulum has been swinging back as, for example, the Federal Reserve has been ratcheting up interest rates and tightening liquidity, activist activity is once again on the rise, Republicans have taken control of the House, and back-to-office policies have been eased into effect. In this environment, stasis is the exception rather than the norm, and boards must continue to be nimble … Read more
The rapid growth of social media over the past two decades has presented firms with a significant challenge: Users of social media can share and disseminate damaging information with potentially adverse consequences. Prominent examples that went viral include accounts of racist and sexist treatment of employees at Walmart, unsafe working conditions at Amazon, unfair pay practices at Chipotle, and environmental violations at Nestlé. As noted by social psychologist Takuya Sawaoka, “[t]he internet now allows […] thousands of people to participate in collective […] [monitoring], in a way that wasn’t possible before” (Meinch, 2021). These anecdotes suggest an important, yet unexplored, … Read more
A new and potentially significant tool in regulatory enforcement is emerging for executives whose companies suffer a cybersecurity incident. The Federal Trade Commission (“FTC”), in a recently proposed Decision and Order, held James Rellas, the Chief Executive Officer (“CEO”) of Drizly LLC (“Drizly”), personally liable for presiding over the company’s failure to implement and apply appropriate information security practices, which led to a data breach resulting in the exposure of 2.5 million consumers’ personal information.
The decision marks the first time a senior corporate officer has been found to have personal civil liability … Read more
I recently participated in a festschrift for retired justice (and noted stakeholderist) Leo E. Strine, Jr., hosted by the University of Pennsylvania Journal of Law and Business. Justice Strine’s interventions in the debate over shareholder primacy have added heft, pragmatism, and public mindedness to the stakeholderist side. In my contribution to the symposium, I try to surface a hidden aspect of the debate.
I argue that shareholder primacy creates a competition with a single endpoint, the very best kind of game. The exhilarating tournament that results, separate and apart from any ethical or instrumental justification, is an underappreciated aspect of … Read more
Machines are increasingly making important decisions that have traditionally been made by humans, such as who should get a job interview or who should receive a loan. For valid legal, reputational, and technical reasons, many organizations and regulators do not fully trust machines to make these judgments by themselves. As a result, humans usually remain involved in AI decision making, which is referred to as a “human-in-the-loop.” For example, in the detection of skin cancer, the process may now involve an AI machine reviewing a photograph of a mole and making a preliminary assessment of cancer risk, followed by a … Read more
Women have traditionally suffered from discrimination in the labor market (Tatli et al., 2013) and are under-represented in upper management (Thams, Bendell and Terjesen, 2018). To address this widespread gender imbalance, many countries have implemented gender diversity policies ranging from enforceable quotas with hard or soft sanctions to voluntary recommendations included in corporate governance codes. While multiple European Union (EU) member states developed their own legislation, the European Parliament introduce on June 7 a gender quota so that, by 2026, “at least 40% of non-executive director posts or 33% of all director posts are occupied by the under-represented sex… Read more
Over the past decade, investors, companies, and commentators have increasingly accepted and adopted stakeholder governance as the way to pursue the proper purpose of the corporation and have embraced consideration of environmental, social and governance (ESG) issues in corporate decision-making toward that end. But an emerging movement opposed to any consideration, at all, of ESG factors threatens to erase the gains that have been made over the past ten years and revert to the outdated view that the purpose of a company is solely to maximize short-term shareholder profits.
This debate is playing out very publicly, with politicians at the … Read more
FTX is a Bahamas-based cryptocurrency exchange founded in 2019 that, at its peak in 2021, had over 1 million users, making it the world’s third largest crypto exchange by volume. Since November 11, 2022, though, FTX has been in bankruptcy, having borrowed extensively and used the assets of its clients in a likely and spectacular fraud.
Why did the capital-markets system fail to provide the checks and balances that investors count on, leaving the crypto market in the hands of operators hostile to regulation? How can we avoid a system beholden to Sam Bankman-Fried, Mark Zuckerberg, Elon Musk, and … Read more
Last month, the Department of Justice Antitrust Division announced its first criminal attempted monopolization charges in more than 40 years. In the case, U.S. v. Zito, Nathan Nephi Zito, the owner of a Montana paving company, pleaded guilty to a violation of Section 2 of the Sherman Act after allegedly attempting to allocate geographic markets per the terms of a proposed agreement with his only rival. The guilty plea came about after the rival blew the whistle on the attempt and cooperated with the Antitrust Division by recording phone calls with Mr. Zito. The guilty plea is notable because, … Read more
Members of Congress and financial regulators from the Federal Reserve, U.S. Treasury, SEC, CFTC, and CFPB appear set on regulating the crypto trading system (traded coins and associated marketplaces, exchanges, brokerages, lending, staking, derivatives, intermediaries, and enablers) as part of the traditional financial services system. Policy discourse on this topic has centered around which – rather than whether – financial regulators should be in charge of crypto trading. In advancing this view, Congress and the regulators appear to be following a path laid out by crypto companies seeking legitimacy through inclusion (on their own terms), in regulated finance.
Supporters of … Read more
On November 17, 2022, the Financial Industry Regulatory Authority (“FINRA”) issued a special alert to FINRA members concerning the heightened threat of fraud in small capitalization initial public offerings (“IPOs”). At the same time, both the New York Stock Exchange (“NYSE”) and the Nasdaq Stock Market (“NASDAQ”) released separate notices to their members expressing similar regulatory scrutiny in connection with small-cap IPOs. In Regulatory Notice 22–25, FINRA observed the recent trend of significant unusual price increases on the day of or shortly after the IPOs of certain small-cap issuers, most of which involve issuers with operations in China and other … Read more
Investors now routinely turn to crypto asset trading for portfolio appreciation and diversification, but significant investor protection concerns loom. Between 2017 and 2019, thousands of crypto assets were offered to the public and others through initial coin offerings. Many of those offerings were legitimate, and the crypto assets they facilitated continue to support applications and actively trade on crypto exchanges. But many other crypto asset initial offerings were riddled with fraud, with crypto asset sponsors and others misrepresenting to investors key aspects of the offering.
Now, as crypto asset investing has evolved to include widescale secondary trading of crypto assets … Read more
On November 7, a federal judge ruled that LBRY Credits (“LBC”) are securities, and thus LBRY violated Section 5 of the Securities Act of 1933 by selling LBC. LBRY responded with a tweet describing the ruling as “extraordinarily dangerous precedent that makes every cryptocurrency in the U.S. a security, including ethereum.”
SEC v. LBRY, Inc. treads new ground in one sense. It is the first time a federal court has found a token sold outside of an Initial Coin Offering (“ICO”) to be a security. The real question is whether the ruling really means every cryptocurrency is a … Read more
Student loans are becoming a major challenge for the United States. An estimated 43 million borrowers owe about $1.6 trillion dollars, meaning a significant fraction of U.S. households is burdened with debt that is not dischargeable in bankruptcy. The problem has taken on increased political and economic significance since the Biden Administration announced a federal student-loan forgiveness program that opponents have criticized as a $400-billion social welfare program for the well-to-do.
In a new paper, we take a novel approach to student loan forgiveness by empirically exploring whether it has important economic benefits that could at least partially offset its … Read more
On October 11, 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) and the Financial Crimes Enforcement Network (FinCEN) announced settlements for approximately $24 million and $29 million, respectively, with virtual currency exchange Bittrex, Inc. (Bittrex). The settlements represent the first parallel enforcement actions by FinCEN and OFAC in the virtual currency space and OFAC’s largest virtual currency enforcement action to date. The investigations by OFAC and FinCEN found that the company engaged in apparent violations of several sanctions programs and willful violations of the Bank Secrecy Act’s (BSA’s) anti-money laundering (AML) program and suspicious activity … Read more
Patent thickets are dense webs of overlapping intellectual property rights. They are common in industries ranging from semiconductors to smartphones to pharmaceuticals. When many firms own the underlying patents, thickets complicate licensing negotiations and increase the risk of holdup and litigation. These costs can be enormous: In 2021, for example, Intel paid $2.1 billion to VLSI Technology after a jury ruled that it had infringed two of VLSI Technology’s semiconductor patents. Conversely, firms that build their own patent thickets can use them to defend against litigation or even to crowd out competitors. This strategy allowed pharmaceutical companies such as AbbVie, … Read more
One of the hottest topics in the business world is ESG ratings, which are designed to measure the environmental, social, and governance risks of a company. The idea is that increased transparency about companies’ ESG risks will motivate those with a low scores to improve and at least match the performance of competitors with high scores. Yet research on whether these ratings actually work is surprisingly sparse.
In a new study, we examined how companies responded to some of the first ESG ratings in the early 1990s issued by KLD Research & Analytics (KLD), a pioneering ESG rating agency. Contrary … Read more
On September 28, 2022, the European Commission released a proposal to change the legal landscape for companies developing and implementing artificial intelligence in EU Member States. This AI Liability Directive would require Member States to implement rules that would significantly lower evidentiary hurdles for victims injured by AI-related products or services to bring civil liability claims. Most importantly, the Directive would create a “presumption of causality” against the AI system’s developer, provider, or user.
The proposed AI Liability Directive should be seen as part of a broader package of EU legal reforms aimed at regulating AI and other emerging technologies. … Read more
In March 2022, the SEC proposed mandatory climate disclosures for public companies. While climate activist investors applauded the proposed rules, opponents lamented their scope and cost, arguing that the SEC lacks the authority to promulgate such rules. But the debate largely overlooked a key point: The success of a climate disclosure regime – mandatory or voluntary – rests on accuracy of the disclosure. By some accounts, the private right of action is the most effective way to prevent companies from providing misleading information to their shareholders. The SEC lacks the resources and, in a controversial area like climate, may … Read more
On December 2, 2022, Columbia Law School will hold its 2022 Conference on Mergers & Acquisitions and Corporate Governance. The event is co-sponsored by the school’s Ira M. Millstein Center for Global Markets and Corporate Ownership, the Columbia Law School Center on Corporate Governance, and the law firm of Paul Hastings LLP.
The event brings together members of the federal and Delaware judiciaries, government regulators, academics, and prominent M&A and corporate governance practitioners. This year’s panelists are scheduled to include Delaware Chancellor Kathaleen St. J. McCormick, Delaware Vice Chancellor Lori W. Will, U.S. Senior District Judge Jed S. Rakoff, Chief … Read more
A fundamental question in corporate governance research is whether the board of directors affects firm value. Some argue that directors contribute no additional value to the firm and may even lower its value if they act only as a rubber stamp on the CEO’s decisions. However, the weight of evidence is that directors can increase value by, for example, using their experiences and connections to improve firm performance in specific settings.
Yet, largely absent from the literature is an investigation of whether individual directors possess unique characteristics that increase value, irrespective of which boards they sit on or the prevailing … Read more
Financial covenants have gone in and out of style over the last 30 years. They serve to transfer control rights to lenders when a borrower’s financial metrics breach pre-set contractual thresholds and so provide an interesting laboratory to study debtholder-shareholder conflicts and how they are potentially resolved. First, covenants can enhance efficiency by making contracts between lenders and their borrowers more complete. Second, through the contingent transfer of control during the term of the loan, they provide scope for renegotiation and wealth transfers that are primarily at the discretion of the lender.
In practice, covenant violations are associated with a … Read more
The Securities and Exchange Commission today [November 15] announced that it filed 760 total enforcement actions in fiscal year 2022, a 9 percent increase over the prior year. These included 462 new, or “stand alone,” enforcement actions, a 6.5 percent increase over fiscal year 2021; 129 actions against issuers who were allegedly delinquent in making required filings with the SEC; and 169 “follow-on” administrative proceedings seeking to bar or suspend individuals from certain functions in the securities markets based on criminal convictions, civil injunctions, or other orders. The SEC’s stand-alone enforcement actions in fiscal year 2022 ran the gamut of … Read more
Investor demand for information about firms’ environmental, social, and governance (ESG) commitments has prompted substantial corporate disclosure of their ESG activities. However, these disclosures often raise questions of “social washing,” where firms make unsubstantiated claims or misrepresent their company as more socially responsible than it is.
In a recent study, we consider social washing related to diversity, equity, and inclusion (DEI). Beginning in 2020, the Securities and Exchange Commission (SEC) required publicly-traded firms to include under Item 1 “Business” of their 10-K filings a description of the registrant’s human capital resources, including the number of persons employed by the registrant … Read more
The traditional IPO was once the dominant path to raising capital for a growing company, but challengers, most notably SPACs and direct listings, have emerged. In our essay, we argue that the regulation of public offerings should seek to facilitate the transition from private company to public when this transition maximizes the joint welfare of investors and the issuer. Although the SEC frequently invokes investor protection as the goal of securities regulation, investors bear the cost of regulation, too. A lighter regulatory touch may be appropriate if markets have efficient price discovery.
To identify efficient pricing, we start with the … Read more
In 2020, the United States-Mexico-Canada Agreement (“USMCA”) entered into force, replacing the 1994 North American Free Trade Agreement (“NAFTA”). Both treaties include certain protections that the contracting states must afford to nationals of the other contracting states investing in their territory, and provide for arbitration as a forum to recover losses from breaches of those protections. However, USMCA contains additional limitations and restrictions on foreign investors’ rights to pursue claims in arbitration for breach of the treaty’s terms. Under Annex 14-C of USMCA, claims related to foreign investments established or acquired while NAFTA was in place (so-called “Legacy Investments”) may … Read more
SEC regulations require public firms to disclose any “material event” on a form 8-K filed within a certain time period. These events include earnings announcements, changes in an executive or director, changes in auditor and the issuance of new debt or equity. The news can be good or bad, and firms often issue press releases explaining the event.
We examine whether firms forced to disclose bad news issue press releases touting unrelated news around the time of the filing to distract investors. We study a broad sample of thousands of 8-K filings that are accompanied by press releases and find … Read more
Financial disclosure is critical for the efficient allocation and reallocation of capital. However, the debate on the costs and benefits of disclosure mandates is unresolved, and the empirical evidence is mixed. In a new paper, we contribute to this debate by investigating the role of disclosure mandates in the takeover market for banks.
Mergers and acquisitions are essential means of capital reallocation, helping to direct assets towards their best use by reallocating control rights over companies. In 2021 alone, the announced global M&A transaction volume exceeded $5 trillion. Financial disclosures play a critical role in M&A, allowing acquirers to evaluate … Read more
On October 19, 2022, 19 Republican state attorneys general (the AGs) launched a coordinated investigation by issuing civil investigative demands (CIDs) to six major US banks. The CIDs seek information related to the banks’ membership in the United Nations’ Net-Zero Banking Alliance (NZBA) and other climate-related initiatives. The NZBA is an alliance of 120 banks from 41 countries representing 39% of global banking assets. According to the NZBA commitment statement, member banks commit to transitioning their own operational greenhouse gas (GHG) emissions and GHG emissions attributable to their lending and investment portfolios to align with pathways to net zero … Read more
U.S. public firms increasingly use long-term performance-based plans to compensate CEOs. Under these plans, CEOs are expected to receive different levels of pay based on how the firm performs relative to various performance goals over multi-year periods. For example, Tesla gave Elon Musk a controversial pay package in 2018 with an initial estimated value of $2.6 billion and a potential payout of over $50 billion. However, to realize the payout, Musk needs to meet 12 market capitalization milestones and 16 revenue- or earnings-based milestones in the coming 10 years. What Musk will actually receive at the end of the performance … Read more
On October 4, 2022, the White House released the Blueprint for an AI Bill of Rights (the “Blueprint”), which provides non-binding “principles” for organizations in both the public and private sectors to use when developing or deploying artificial intelligence (“AI”) or other automated systems.
The Blueprint does not include many new ideas for AI compliance. Instead, it represents a collection of principles that have been included in laws and guidance published by governments and organizations around the world. But unlike many of those guidelines, it takes a rights-based approach that is focused on AI’s potential harm, rather than a risk-based … Read more
For at least a quarter century, the Securities and Exchange Commission (SEC) has pursued claims of unlawful insider trading where the information at issue was material to the stock price of the sponsor of a clinical trial. In recent years, almost half of these cases were also prosecuted criminally, some resulting in prison sentences. Because the cases arise out of work in a medical academic setting, those charged may not have understood the broad reach of the law, including the misappropriation theory. Training and prophylactic measures may be deficient. The trading based on inside information about clinical trials is similar … Read more
On October 20, 2022, the Committee on Foreign Investment in the United States (“CFIUS” or “the Committee”) released its first-ever guidelines (the “Guidelines”) pertaining to the enforcement actions that CFIUS may take under applicable statutes and regulations (“CFIUS Rules”). The Guidelines are neither comprehensive nor binding, nor do they provide CFIUS with any new authorities, but they do provide insight into how CFIUS will approach enforcement. They may also forecast an increase in CFIUS’s enforcement activities, which have been limited to date.
We summarize the key aspects of the Guidelines and provide related takeaways below.
Types of Violations
The Guidelines … Read more
In a new paper, we compare the main models of corporate governance (Schoenmaker, Schramade and Winter, 2022). One is the stakeholder model, which recognizes that companies have responsibilities to society that are broader than just making a profit. A problem with that model, though is that it includes multiple goals, making it difficult to hold management accountable. Moreover, the traditional stakeholder model tends to focus on stakeholders who are directly involved with the company, such as employees and customers. Stakeholders without such a direct relation are given short shrift, even though the company’s conduct clearly affects them – and future … Read more
On September 29, 2022, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued a long-awaited final rule implementing the beneficial ownership information (BOI) reporting requirements of the Corporate Transparency Act (CTA). The final rule adopted much of FinCEN’s December 8, 2021, proposed BOI reporting rule, though FinCEN made several notable amendments in the final rule.1
Among other things, the final rule:
- adjusts some of the reporting timelines established in the proposed rule;
- does not recognize additional types of entities that are exempt from the CTA’s reporting requirements, but clarifies the application of certain exemptions and that no filing
… Read more
A recent policy innovation is the use of securities regulations to solve social challenges. It started with mine-labor-safety and conflict-minerals disclosures in the 2010 Dodd-Frank Act and continues today with the Securities and Exchange Commission (SEC) proposal to mandate climate change disclosures. The ostensive goal is to protect investors but, most likely, the real objective is to affect social change on issues where more traditional policy instruments lack sufficient political support in Congress.
No doubt, the safety of miners, the financing of wars through international mineral trade, and global warming are important issues worthy of the government’s attention. The question, … Read more
In a recent working paper, we highlight a significant transnational dimension to a remarkable corporate governance development: the dramatic increase in attempts by institutional investors to influence how the companies they invest in address material environmental, social, and governance (ESG) concerns. This form of investor action (or “stewardship” as it is often called) is increasingly common in many markets across the globe.
Scholars have identified various factors behind investors’ focus on ESG when engaging with their investee companies. These include investors’ desire to manage non-diversifiable (or “systematic”) investment risks such as climate change, and political and regulatory initiatives that prompt … Read more
On October 26, 2022, the Securities and Exchange Commission (SEC) adopted new rule and form amendments (the Amendments) that require mutual funds and exchange-traded funds to (i) transmit annual and semi-annual shareholder reports that highlight certain key information such as fund expenses, performance and portfolio holdings, (ii) make available additional information that may be relevant to investors and financial professionals and (iii) provide enhanced expense-related disclosures in investment company advertisements. The new rule also excludes open-end registered investment companies from the scope of Rule 30e-3 under the Investment Company Act of 1940 (Investment Company Act) so that open-end fund shareholders … Read more
Securities litigation is a major and costly source of corporate risk that can affect many aspects of companies’ operations. The task of identifying the causes and consequences of this risk is, however, challenging because researchers observe only companies that are sued and not companies that risk being sued. Moreover, surprisingly little is known about how plaintiffs’ lawyers identify which companies to sue. We use scrutiny of companies’ SEC filings by plaintiffs’ lawyers to improve estimates of litigation risk and provide new insights into why certain companies face risk.
We exploit the plaintiff-lawyer need for public information to monitor companies after … Read more
Board-shareholder engagement plays an important role in corporate governance. In the last decade, investors have increasingly influenced business decisions, and their activities have extended beyond the formal submission of shareholder resolutions for voting at annual meetings. On their part, directors and managers have kept an open channel of communication. Yet, much of board-shareholder engagement consists of private interactions and, as a result, very few details about it are reported.
We seek to fill this gap in a new paper that sheds light on closed-door board-shareholder engagement with a survey of SEC-registered corporations. The survey was circulated among corporate secretaries, general … Read more
On October 7, 2022, U.S. President Biden signed Executive Order 14086 on Enhancing Safeguards for United States Signals Intelligence Activities (the “Order”). The administrative Order creates new protections applicable to cross-border data sharing through a phased implementation process and is the latest step toward establishing a new data privacy framework intended to permit the free flow of data from the EU to certain U.S. businesses.
This blog post recaps the history of the EU-U.S. data sharing agreements, examines the key features of the Order, and outlines the process for an assessment of its adequacy by EU authorities.
How Did We
… Read more
The U.S. Securities and Exchange Commission (SEC) recently announced that it was initiating proceedings against a former audit partner at PricewaterhouseCoopers LLP for violating professional standards in reviewing the financial statements of Mattel, Inc. One might wonder why it is the SEC, and not the Public Company Accounting Oversight Board (PCAOB or Board), that is taking action against an accountant for failing to properly perform its audits of a public company’s financial statements. After all, the PCAOB was created by Congress after the financial scandals at Enron, World Com, and other public companies, to oversee public company auditors. The legal … Read more
The report recently issued by the Financial Stability Oversight Council (FSOC) is quite different from the other reports published so far by the U.S. financial regulators in response to Executive Order 14067 on digital assets (FSOC Report).1 Helpfully, this report included a series of specific policy recommendations about what Congress and the regulators ought to do next. But the FSOC Report reveals a continuing lack of consensus and turf wars among the U.S. financial regulators, making its calls for coordination and cooperation ring hollow and introducing incoherence into some of the recommendations.
Following an exhaustive 60-page discussion of the … Read more
Corporate governance guidelines (“CGGs”) are a relatively recent addition to the corporate governance framework of public companies. In 2003, in response to accounting scandals at Enron Corporation and several other large public companies, the NYSE created rules to improve the corporate governance practices of companies listed on the exchange. As part of that initiative, the NYSE directed listed companies to adopt CGGs and to post their CGGs on their company websites.
Under Section 303A.09 of the NYSE Listed Company Manual, companies are required to disclose in CGGs information on seven specific corporate governance topics: director qualification standards, director responsibilities, director … Read more
What we are doing today [October 28]—implementing the statutory clawbacks mandate—is commendable. But how we are doing it—expansively, inflexibly, and impractically—is not. Accordingly, I cannot vote to adopt this rule.
Section 954 of the Dodd-Frank Act generally requires the Commission to direct exchanges to require listed companies to “develop and implement a policy” for disclosing how they handle incentive-based compensation tied to reported financial information and, when that reported information has to be restated, a policy for clawing back related erroneously awarded compensation. Congress did not prohibit us from allowing listing exchanges and issuers some flexibility in crafting, respectively,
… Read more
In recent years, the gap between the compensation of CEOs and their vice presidents (VPs) has been increasing, especially equity compensation (i.e., stock and stock options). Scholars have proposed several explanations. First, the pay differential may relate to the varying risks those executives face in managing their firm. Second, it may be the result of tournament incentives: The senior executive with the highest relative output will typically win the tournament, get promoted to the rank of CEO, and receive the promotion prize. Third, a large pay gap could simply reflect inadequate internal governance of the firm, which will benefit the … Read more
On October 18, 2022, Deputy Attorney General (“DAG”) Lisa O. Monaco announced that Lafarge SA (“Lafarge”), a multi-national building materials manufacturer headquartered in Paris, France, and its Syrian subsidiary Lafarge Cement Syria (“LCS”) had pleaded guilty in the Eastern District of New York to conspiring to provide material support to foreign terrorist organizations, the Islamic State of Iraq and al-Sham (ISIS) and the al-Nusrah Front (ANF), in violation of 18 U.S.C. §2339B. This case represents the first time in which the DOJ has brought such a material support charge against a corporation.
According to the DOJ and as … Read more
Capital market regulation often relies on two methods: imposing restrictions on the actions of parties with private information and requiring greater transparency about these actions. The U.S. Securities and Exchange Commission’s (SEC) recent proposal targeting insider trading abuses follows this paradigm, similar to other proposals related to share repurchases and short selling. The insider trading proposal looks to add restrictions on insiders’ ability to use and trade on Rule 10b5-1 plans, plus enhanced disclosures. In a recent working paper, we use a setting analogous to capital markets to provide evidence that greater disclosure of insider trading is likely to have … Read more
Last month, the first universal proxy card (UPC) hit EDGAR under the new SEC rule. We now have another example, with some interesting tidbits for aficionados and proxy junkies, and also for anyone who seeks an edge in proxy contest voting.
This one concerns Apartment Investment & Management (AIM) in a proxy contest with Land & Buildings (L&B). Compared to the earlier one involving AIM ImmunoTech and a group of individuals (below), it seems more straightforward, although no less contentious. Coincidentally, both involve issuers with a symbol of “AIM”…
AIM filed its preliminary proxy statement last week. L&B filed theirs… Read more
Sustainable investing implies that green assets entail low expected returns because (i) green investors relish holding them and (ii) such assets hedge climate risk by encouraging pro-environmental outcomes. In a new paper, we evaluate whether these predictions are supported by the data using a sample of green bonds. In the process, we investigate (i) whether green bonds are associated with significant returns for bondholders and equity investors, both at the time of issuance and after; and (ii) whether the carbon emissions of the issuers of green bonds fall post-issuance.
Green bonds represent a noteworthy asset class of their own. The … Read more
Thank you, Ken [Bentsen]. As is customary, I’d like to note that my views are my own, and I’m not speaking on behalf of my fellow Commissioners or the SEC staff.
1933 was an important year in SEC history.
No, I’m not referring to the passage of the first federal securities law.
I’m not actually referring to the Securities and Exchange Commission at all.
I mean the other SEC: you know, the Southeastern Conference.
I’m sure, Ken, that you could’ve guessed that, being a Texan, though I think you’ve spent more time in Houston than College Station.
Fall sports are
… Read more
On June 21, 2021, the International Monetary Fund (IMF) weighed in on the economic situation in Africa, and the news was not good.
“African economies are at a pivotal juncture,” the IMF said. “The COVID-19 pandemic has brought economic activity to a standstill. Africa’s hard-won economic gains of the last two decades, critical in improving living standards, could be reversed. High public debt levels and the uncertain outlook for international aid limit the scope for growth through large public investment programs. The private sector will have to play more of a role in economic development if countries are to enjoy … Read more
In the wake of the industry’s recent significant bankruptcy filings, crypto watchers are focusing for the first time on which crypto-entities are eligible for chapter 11 relief under the U.S. Bankruptcy Code (the “Bankruptcy Code”) and, if so, whether, and under what circumstances, crypto-assets held by the debtor may become property of the debtor’s “estate.” As previously posted, if a customer’s crypto-assets are deemed part of the debtor’s estate, the customer may be treated as a general unsecured creditor and, thus, potentially stand to lose some or all of the value the crypto-assets held by … Read more
The new report by the National Association of Corporate Directors (“NACD”), A Framework for Governing into the Future (the “NACD Report”), is a valuable contribution to corporate governance discourse. Among its primary offerings are a forward-looking perspective on governance and a vision of a more engaged and committed board.
The NACD Report is perhaps the most prominent statement of governance principles since the 2018 release of the Commonsense Principles of Governance Practice 2.0. Furthermore, the NACD Report builds upon, yet differs in style and substance from, the tactical approach of the Commonsense Principles and the last (2016) version of the … Read more
Reg FD cases rarely get to court, but here’s one that, barring a settlement, appears to be headed to trial. In a 129-page opinion in SEC v. AT&T, 9/08/22, the federal district court for the SDNY denied summary judgment for both sides in a case the SEC brought in March of 2021 against AT&T and three members of its Investor Relations Department for violations of Reg FD. (See this PubCo post.) The SEC alleged that, in March 2016, AT&T learned that, as a result of a “steeper-than-expected decline in smartphone sales,” AT&T’s first quarter revenues would fall short … Read more
Our paper utilizes National Collegiate Athletic Association (NCAA) Football Bowl Subdivision (FBS) coaching contracts as a managerial setting to examine whether higher top-managerial pay (our Gridiron CEOs) is associated with better team performance. Coaching contracts are quite compelling as they are available for nearly all public universities. Such contracts are for fixed terms: five years on average, with some as long as ten years. In contrast, CEO contracts are mostly “at-will,” meaning they can be terminated without liability, while the rest are for terms of from two to five years.
Dave Clawson, the head coach at Wake Forest University, posted … Read more
There has been significant regulatory attention recently to “dark patterns,” including FTC guidance, state privacy laws, and state and federal enforcement actions. Some of this activity involves new regulations, and some is based on decades-old consumer protection laws that prohibit unfair and deceptive practices.
There is no single definition for “dark patterns,” but the term generally refers to user interfaces (e.g., websites, apps) that are designed to manipulate a user’s behavior and subvert a consumer’s choices, causing the user to engage in conduct that they did not expect or desire, or impairing individuals’ ability to make … Read more
Military strategy and takeover strategy share a few things in common. At some point, generals and M&A lawyers each must recognize that the old technology no longer works as it did in the past and can no longer dominate the battlefield. For example, in the Ukraine war, it has become obvious that battle tanks are vulnerable and do not reign supreme. Correspondingly, in the takeover war, the poison pill is no longer the absolute showstopper it once was and can be outflanked by activist hedge funds seeking to run a proxy contest — even if only for a minority of … Read more
In recent months, the SEC has been the subject of intensifying criticism regarding its role in cryptoasset regulation. While some critiques properly raise questions and engage in constructive debate, others have resorted to shrill attacks that betray a reflexively adversarial position toward any agency involvement in the cryptoasset space. We continue to maintain that far greater regulatory clarity is indispensable to sustainable growth in the cryptoasset industry. While we do not believe that such clarity comes from civil enforcement actions that are lodged against ancillary players with limited transparent analysis, it is just as important that public debate about the … Read more
The economic benefits of corporate social responsibility (CSR) and workplace gender diversity are areas of growing interest for business leaders and regulators. Research shows that socially responsible activities enhance firm value while irresponsible social activities destroy value and that firms with more women directors tend to do better on social and environmental issues. In a new study, we examine the interplay between board gender diversity and CSR performance on firm value, more specifically, whether female representation on the board moderates the effect of CSR performance on firm value.
Several arguments suggest that board gender diversity could reduce the negative effect … Read more
Corporations are increasingly adding the role of Chief Sustainability Officer to their executive teams — at pay levels that place them among the top five Named Executive Officers — reflecting rising recognition of environmental, social and governance risk. In this study, we examine the prevalence of these positions among NEOs and how aggregate pay compares with other executive roles. Separately, we look at how the pay of Chief Risk Officers and Supply Chain Officers compares with other NEOs.
- Fewer than 1% of NEOs were CSOs in fiscal 2021
- The median total compensation of CSOs is higher than the
… Read more
Headlines during earnings season often focus on the forward-looking guidance corporate managers provide. Yet, questions remain about managers’ perceptions of the guidance process and the tradeoffs they face in deciding whether and what to guide. To gain greater insight, we surveyed 357 managers at publicly listed corporations and conducted nine in-depth interviews.
Our survey sheds light on the critical role guidance plays during earnings season. Because analysts and investors dislike surprises, our respondents said guidance provides an effective channel to manage expectations. Around earnings announcements, corporate managers commonly meet privately with analysts and investors after conference calls. Our respondents said … Read more
Biden-appointed antitrust officials have asserted, unfairly in our view, that private equity firms deserve heightened scrutiny when they engage in corporate transactions. For example, the head of the DOJ’s Antitrust Division said in an interview with The Financial Times earlier this year that the private equity business model “is often very much at odds with the law and very much at odds with the competition we’re trying to protect.” The Chair of the Federal Trade Commission has similarly stated in a separate Financial Times interview that private equity firms’ acquisitions can have “life and death consequences.”
Agency criticism of private … Read more
The days when activists focused on fights over social issues while businesses concentrated on the pursuit of commercial profit are gone. Through pronouncements, boycotts, sponsorships, lobbying, investments, and divestment, businesses and their executives are at the forefront of some of the most important and contentious issues of our time, from the Russian invasion of Ukraine to voting rights to gender equity. As a result, the traditional understandings of capitalism and activism in American life have changed, a topic that I explore in a recent article and a new book.
Throughout U.S. history, corporations have played a critical role in social … Read more
In March 2022, the Financial Times reported a “boom” in environmental, social and governance (ESG) ratings, with a “race to carve out market share in the very lucrative business of providing advice to investors on environmental, social and governance issues”. These ratings typically assess the impact of ESG factors on a company or product and (in some cases) a company’s impact on the outside world.
It is estimated that there are some 140 different ESG data providers in the market currently, including ESG branches of well-known agencies such as Refinitiv, Moody’s, S&P and Morgan Stanley Capital International (MSCI). This growth … Read more
Corporate law prohibits companies from pursuing profits through criminal misconduct. It uses the fiduciary duties imposed on boards under the Caremark doctrine, and the threat of personal liability of directors for deliberate breach, to help motivate directors to make sure their companies comply with the law. Yet Caremark has largely failed: Most boards have neither adopted effective systems to deter corporate crime nor asserted effective oversight over investigations. Caremark did not require directors to obtain information about material compliance failures or detected misconduct, information essential to effective oversight. To induce directors to deter misconduct – even when it is … Read more
Fraud causes significant losses to investors each year. Frauds that affect issuers and their investors may involve asset misappropriation, financial reporting misconduct, or, more generally, corruption. The Association of Certified Fraud Examiners (“ACFE”) estimates that organizations lose 5% of revenue to fraud each year, an estimated loss of $4.7 trillion on a global scale.
As we have emphasized on many occasions, independent auditors play an important gatekeeper role in supporting high-quality financial reporting and the protection of investors. A critical aspect of this role is an independent auditor’s responsibilities with respect to fraud detection during
… Read more
In a recent paper, we use the law protecting directors and officers of Nevada-incorporated firms from liability to study how such laws relate to corporate tax avoidance. Under the 1987 law, those directors and officers are liable only if they breach the duty of loyalty and engage in intentional or illegal misconduct. Not only is the standard of liability higher in Nevada than in any other state, but it also applies to officers and directors rather than, as in other states, just directors.
Current theory, largely following the work of Desai and Dharmapala (2006, 2008), suggests that corporate tax … Read more
On September 28, in an action by the National Association of Manufacturers against the SEC and Chair Gary Gensler, the U.S. District Court for the Western District of Texas held that the SEC violated the Administrative Procedure Act when, in June 2021, Corp Fin stated that it would not recommend enforcement of the 2020 proxy advisory firm rules while those rules were under reconsideration. In 2022, however, the SEC formally adopted new amendments to the 2020 rules reversing some of the key provisions and, at the same time, rescinding Corp Fin’s non-enforcement statement. You might think that the adoption … Read more
Stock repurchases are popular. Between January 2009 and 2018, S&P 500 firms spent $4.3 trillion to buy back their shares, which is significantly more than these firms spent on dividend payments to their shareholders (Lazonick, Sakinç, and Hopkins, 2020). Stock repurchases are also controversial. Skeptics argue that, contrary to what managers claim, repurchasing isn’t done to buy undervalued stocks but to benefit the managers themselves. Shilon (2020) cites examples of how managers repurchase stocks to meet earnings-per-share (EPS) targets set in their compensation contracts and thus increase their personal compensation. Nguyen, Vu, and Yin (2020) reveal a negative association between … Read more
Under the Biden administration, the U.S. antitrust agencies are taking an aggressive approach to merger enforcement, and have outlined strategies that move away from historical merger review tools in favor of more enforcement-friendly standards. But recent court decisions have tested this new approach. Despite agency advocacy for novel theories, these decisions applied traditional legal analysis to find for the merging parties, questioning the agencies’ ability to change merger review standards.
Three agency losses in September 2022
The Federal Trade Commission (FTC) recently challenged a vertical merger in the biotechnology sector and the Department of Justice (DOJ) challenged two mergers in … Read more
Much of the vast literature on corporate governance focuses on internal issues, such as board characteristics. Yet external governance – the market for corporate control, often known as the takeover market – is critical to determining how well a company is run. Managers are less likely to exploit shareholders when subject to the discipline of the takeover market, making it a governance instrument for reducing agency problems. In a new study, we demonstrate the impact of the takeover market on companies by investigating how it affects an important measure of their financial health: credit ratings.
Credit ratings provide information on … Read more
Directors, officers and other fiduciaries (together, “fiduciaries”) owe two primary duties to a corporation and its shareholders: the duty of loyalty and the duty of care. The duty of loyalty requires that fiduciaries make business judgments in the honest and good faith belief that the judgments are in the best interests of the organization, without personal motivations. The duty of care calls for fiduciaries to act with the same care that a prudent person would use in similar circumstances. Fiduciaries are entitled (and encouraged) to seek information from management and outside advisers in the performance of their duties.
An important … Read more
According to conventional wisdom, climate mitigation by governmental regulation should target the reduction of greenhouse gas emissions. Indeed, corporations and industries, including their products and supply chains, are the main source of greenhouse gas emissions, which cause global warming and climate breakdown. However, in a recent paper, I argue that regulators suffer from a blind spot when it comes to climate change mitigation: corporate climate obstruction.
Climate obstruction by firms is a sophisticated, manipulative practice involving climate denial, climate washing, and other deceptive corporate behaviors that aim to impede, block, and delegitimize climate legislation and regulation. The end goal of … Read more
On September 20, 2022, the SEC announced settled charges and the imposition of a $35 million penalty against a dually registered investment adviser and broker-dealer (the “Firm”) for violations of Regulation S-P (“Reg S-P”). The SEC found that the Firm violated Reg S-P’s requirements for registrants to adopt written policies and procedures to safeguard customer records and information (the “Safeguards Rule”) and to take reasonable measures to protect against unauthorized access or use of consumer report information and records in connection with disposal of this material (the “Disposal Rule”).
This matter is the first SEC enforcement action under Reg S-P’s … Read more
Awareness of the cultural dimension of diversity in corporate boards has been on the rise. Directors’ cultural values can affect how effective corporate boards are in advising and monitoring managers and, ultimately, how well a firm performs. At the same time, increased globalization and rapid technological developments put substantial competitive pressure on businesses. In a new paper, we examine whether cultural diversity on corporate boards can help firms compete.
It is well documented that culture significantly influences individuals’ values, beliefs, and preferences. The variety of values and perspectives of a culturally diverse board can facilitate information sharing, catalyze critical thinking, … Read more
The number of securities lawsuits filed since January has remained steady compared to the first half of 2021. We have already seen many notable developments in securities law this year. This mid-year update provides an overview of the major developments in federal and state securities litigation in the first half of 2022:
I. Filing And Settlement Trends
According to Cornerstone Research, although new filings remain consistent with the first half of 2021, the number of approved settlements is up over 30% from the same time last year, and the median settlement amount has rebounded from the low that we reported … Read more
As we get closer to the October 17th scheduled trial date for the Twitter lawsuit to compel Elon Musk to complete his proposed $44 billion acquisition of Twitter, the charges and allegations are getting wilder and woolier. Once, this was a case in which the party seeking to escape the merger agreement (i.e., Musk) asserted that the percentage of Twitter accounts that were “bots” (or fake) amounted to a “material adverse change” that permitted the buyer to back away. Given both Delaware’s strong commitment to deal certainty and Musk’s seemingly reckless indifference to due diligence, most law professors saw Musk … Read more
After determining that the DOJ failed to meet its burden of proof, a Delaware federal court denied the government’s request to enjoin the $315 million acquisition of Imperial Sugar by U.S. Sugar. The court found that the DOJ failed to prove a proper antitrust market and criticized the government’s expert for, among other things, failing to take account of the realities of the sugar industry in the United States. The public version of the court ‘s opinion was docketed on September 28. The DOJ has appealed, and the Third Circuit ordered expedited briefing but denied the DOJ’s motion for an … Read more
Should private social media companies have a free hand in deciding what content to allow on their platforms? Governments from the European Union to India to the U.S. states of Texas and Florida are increasingly answering no, as they seek to co-exist with a range of self-regulatory initiatives created by the platforms. Meta – formerly Facebook – has gone furthest in establishing a self-regulatory mechanism, creating an appeals process for Facebook and Instagram users who disagree with its content moderation decisions in the form of a quasi-judicial Oversight Board. This body of independent experts, established in late 2020, determines … Read more
Boards are regularly called upon to guide management teams in answering the age-old strategic question: build or buy? But the already complex business calculus has become increasingly complicated in the past several years because of stepped up scrutiny of mergers by regulators that has made outcomes less predictable.
One need look no further than the front page to find news of transactions abandoned after governmental challenges. Meanwhile, leaders at the Department of Justice and Federal Trade Commission and other competition authorities have spoken of the need to reconceive antitrust law and have voiced support for aggressive new theories about protecting … Read more
Elite U.S.-based global law firms (Biglaw) concentrate their offices in the costliest districts of superstar cities, especially two neighborhoods in Manhattan. This pattern has persisted despite both the dispersal of Biglaw clients across less-dense, lower-cost U.S. locations and the development of telework capacity. This suggests a puzzle: Law is among the occupations with the highest theoretical propensity for remote work, yet prior to the pandemic, Biglaw required in-person work in the priciest places – meaning it paid (and continues to pay) a premium on both of its biggest expenses, wages and real estate. Yet Biglaw is famously profit-driven, suggesting … Read more
On September 21, 2022, the Securities and Exchange Commission found that Cheetah Mobile Inc.’s Chief Executive Officer, Sheng Fu, and its former President, Ming Xu, committed insider trading in relation to securities they sold under a joint “10b5-1 plan.” In addition to paying civil penalties, they also agreed in a Cease-and-Desist Order to various undertakings, which notably includes Fu adhering to a 120-day cooling-off period for his future 10b5-1 plans. The undertakings in the Order reflect the SEC’s recently proposed, but not yet adopted, amendments to Rule 10b5-1, perhaps signaling the next steps of the SEC and best-practices of the … Read more
In recent years the corporate debt landscape in emerging markets has changed substantially. Debt in emerging economies climbed to a record high of $55 trillion in 2018, illustrating the largest and fastest surge in the last five decades. In addition, according to the International Monetary Fund (IMF) 2015 report, the mean ratio of corporate debt to GDP grew by 26 percent. These recent developments are important and have raised broad concerns because emerging economies account for 60 percent of the global GDP.
High levels of leverage could either constrain or accelerate firm growth. In addition, high corporate debt … Read more
One of the most difficult challenges for cybersecurity professionals is the increasing complexity of corporate systems. Mergers, vendor integrations, new software tools and remote work all expand the footprint of companies’ information systems, creating a larger attack surface for hackers. The adoption of artificial intelligence presents additional and, in some ways, unique cybersecurity challenges for protecting the AI models themselves as well as the sensitive data that is used to train and operate the AI systems.
On August 31, 2022, in recognition of these growing challenges, the UK National Cyber Security Centre (“NCSC”) released its Principles for the Security of … Read more
Here’s the second episode of The Cutting Edge, a podcast series that examines white collar crime and corporate governance. This episode, “Special Counsel: Whose Interests Do They Serve?” looks at the history and unique status of the special counsel role as well as the risks it can pose.
Hosted by John C. Coffee Jr., the Adolf A. Berle Professor of Law at Columbia Law School, and with Jed S. Rakoff, a federal senior district judge for the Southern District of New York and an adjunct professor at Columbia Law, joining as commentator, the episode focuses on the … Read more
The SEC has long taken a hands-off approach to private markets. Instead of direct regulation, the commission has used investor access restrictions to create high-end contracting environments where investors (in theory) have the resources necessary to fend for themselves. But in early 2022, this hands-off philosophy was turned on its head. In response to booming growth and concerns about harms to public pension plans and other institutional investors, the SEC proposed a sweeping set of regulatory interventions in the $18 trillion private fund industry (the “Private Fund Proposal”), a vast and important part of the private market ecosystem.
In a … Read more
On September 13, 2022, the United States Department of Justice (DOJ) announced a settlement with Prosperity Bank, a regional bank with branches in Texas and Oklahoma, for processing a Paycheck Protection Program (PPP) loan on behalf of an ineligible borrower.
Although the settlement was for less than $20,000, it is nonetheless noteworthy because it is the first time DOJ has publicly settled with a PPP lender for alleged violations of the False Claims Act (FCA) (though DOJ has been actively pursuing fraud cases against PPP borrowers for some time).
Importantly, this settlement announcement comes on the heels of recent legislation… Read more
Public versus private status is a common point of differentiation among companies and can determine, for example, how they are regulated and who can invest in them. Yet many private companies increasingly resemble their public counterparts. This blurring of the lines between public and private has been gradual, and in a new paper, I focus on three areas in which it has occurred: firms’ sources of capital, governance structures, and reliance on acquisitions to fuel growth.
First, there is growing overlap between public and private firms’ sources of capital. Private firms have traditionally been owned by founders and angel investors, … Read more
On September 6, 2022, in Construction Industry Laborers Pension Fund on behalf of SolarWinds Corporation, et al. v. Mike Bingle, et al. (“SolarWinds”), the Delaware Chancery Court granted a motion to dismiss a derivative suit against directors of SolarWinds Corporation, a provider of information technology infrastructure management software, for allegedly breaching their fiduciary duty of loyalty by failing to oversee the company’s cybersecurity risk, which, plaintiffs claimed, resulted in a major cyber breach in 2020.
Vice Chancellor Sam Glasscock III held that plaintiffs failed to allege demand futility with sufficient particularity, as required to pursue litigation derivatively … Read more
The basic goals of executive compensation have changed little since the advent of large corporations in the late 19thcentury: Provide strong incentives to increase shareholder value, retain key talent, and limit shareholder cost. The literature of compensation consultants and HR executives, however, claims that the guiding policy used to achieve these objectives has indeed been revised. In the first half of the 20th century, it was fixed sharing in a measure of value added, typically, a fixed percentage of an economic profit measure. Since then, it has been “competitive pay policy,” that is, target compensation set at … Read more
On August 25, 2022, the Securities and Exchange Commission (SEC) published a draft Strategic Plan (the Plan) for fiscal years 2022–2026. The Plan focuses on three goals that, according to SEC Chairman Gary Gensler, advance the SEC’s mission to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. The Plan is open for public comment until September 29, 2022.
The goals of the Plan are:
Protecting Retail Investors Against Fraud, Manipulation, and Misconduct
Investor protection remains a core value for the current SEC, while keeping technological innovation essential to the agency’s considerations:
… Read more
A remorseful acquirer wants to get out of a merger or acquisition agreement. It concocts a thin justification, which a court wisely rejects, finding unlawful breach. What is the appropriate remedy for harm done to the target?
While attention has focused on the controversy surrounding Elon Musk’s proposed acquisition of Twitter, this question arose in the recent Canadian decision of Cineplex v. Cineworld. The Cineplex court rejected specific performance and instead, in a case of first impression, awarded the target CAD $1.24 billion in expectation damages for loss of anticipated synergies.
Our forthcoming paper takes a close look … Read more
Algorithmic trading (AT) is one of the most notable financial innovations in several decades and constitutes a substantial portion of recent trading in stock markets. However, evidence on the economic consequences of AT is mixed. On one hand, prior research finds that AT expedites the incorporation of public information into stock prices, especially around earnings announcements. On the other hand, studies document that AT reduces price informativeness, thus adversely influencing the extent to which managers learn from stock prices when making investment decisions. In our paper, we examine how AT affects the extent to which directors on corporate boards … Read more
Thank you. It is great to speak to the Investor Advisory Committee (IAC). As is customary, I’d like to note that my views are my own and that I am not speaking on behalf of the Securities and Exchange Commission or SEC staff.
Today, the Committee will cover a wide range of investor issues through four panels and three recommendations. Of these seven topics, the Commission recently has issued proposals on five of them. Your input helps us, both through this meeting and through any materials—including reports, recommendations, and transcripts from today’s conversation—that you may submit to the respective comment
… Read more
How comparable are the financial statements of M&A bidders and acquirers in the same industry? And does financial statement comparability affect the outcome of a deal? In a recent paper, available here, we investigate these questions, using a sample of deals between U.S.-listed firms over the 1987-2021 period.
An accounting system maps economic transactions onto financial statements (Yip and Young, 2012). Accounting comparability reflects the tendency of two firms that have comparable accounting systems to produce similar (or dissimilar) financial statements for a given set of similar (or dissimilar) economic events (De Franco et al., 2011; Barth et al., … Read more
The Securities and Exchange Commission is poised to revise its rules on so-called clawbacks: the process of recovering incentive compensation from current and former executives when a company is forced to make a material restatement of its accounts. With a target of releasing its revisions in October, the SEC has twice reopened public comment periods on proposals that it first advanced in 2015 to implement part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The regulator also added 10 new policy questions along with a memorandum that addressed two matters: the voluntary adoption of clawback policies by companies … Read more
In a new article. I investigate how two financial markets of trillions of dollars each have developed extralegally in the past two decades, creating risks of regulatory enforcement actions and contract defaults. More specifically, I examine (1) how Chinese internet companies from Sina to Alibaba have adopted the structure of a variable interest entity (“VIE”) both to circumvent the Chinese government’s ban on foreign capital in high-tech industries and to get listed on overseas stock markets, and (2) how Chinese entities and foreign investors contract out of China’s stringent regulations on the issuance of international bonds, focusing on one of … Read more
Trading in financial markets is increasingly dominated by algorithms. They enable trading at speeds and levels of adaptiveness that are impossible for human beings. A key question for the legal system is whether these algorithms will disrupt the efficiency and integrity of markets, and if they will, whether existing regulation is well-suited to deterring misconduct. A key question for finance is to determine what market structures are most robust to manipulation by new algorithmic trading agents.
In our new working paper, we study the potential consequences of advanced algorithms trading in a financial market. Specifically, we analyze experimentally how … Read more
On September 15, 2022, President Joe Biden issued an executive order (EO) “on ensuring robust consideration of evolving national security risks” by the Committee on Foreign Investment in the United States (CFIUS or the Committee). The EO does not change CFIUS jurisdiction or process, nor does it, as a practical matter, materially change the factors CFIUS regularly considers (or has considered over the past several years) when reviewing a CFIUS filing for national security risk. Despite the EO’s modest changes to policy, its articulation of some specific areas of concern may have a marginal effect on CFIUS agencies’ future reviews … Read more
What is stock market short-termism? It’s important to know the boundaries between stock market short-termism and other economic ills, because in public discourse many social and economic woes are mistakenly attributed to stock market myopia. But when we mistakenly categorize problems as due to corporate or stock market short-termism, when they in fact have little to do with failing to think and plan for the long run, we misunderstand the problem and miss out on the best remedies. Knowing what is, and just as importantly what is not, due to stock market short-termism is vital so that policymakers, analysts, and … Read more
The U.S. Securities and Exchange Commission (SEC) brought 51, 30, and 33 insider trading cases in 2018, 2019, and 2020, respectively. Whether those numbers mean that insider trading is relatively uncommon or that the cases regulators and prosecutors have pursued are just the tip of the iceberg is difficult to determine and poses a challenge for studying insider trading.
We address this challenge in a new paper on how option investors responded to a significant increase in the likelihood and severity of prosecution after hedge-fund manager Raj Rajaratnam’s arrest in October 2009. His case marked the start of a major … Read more
Today [September 14], the Commission will consider whether to propose standards for covered clearing agencies (also known as clearinghouses) regarding the clearance of certain trades involving U.S. Treasury securities. I am pleased to support these rules because, if adopted, they would help to make a vital part of our capital markets more efficient, competitive, and resilient.
The $24 trillion Treasury market—the deepest, most liquid market in the world—is the base upon which so much of our capital markets are built. Treasury markets are integral to how the Federal Reserve administers monetary policy. They are how we, as a government and
… Read more
Corporate law – and fiduciary law in general – has struggled with how to handle loyalty duties that are harmful to society. For example, a director’s act of loyalty to shareholders that harms the environment, or a director’s effort to benefit her corporation by breaking the law. Not all of these cases are easily resolved by refinements to the law. In some cases, though, the courts have indicated that the conduct at issue is not merely unacceptable, but also inconsistent with the fiduciary’s own obligation to be loyal. A notable instance is when directors intentionally violate the law to benefit … Read more
The recent pushback by conservative legal groups against equality and diversity on corporate boards has accelerated to new levels in the past few months. The latest example is a challenge to Nasdaq’s board diversity rule, which was approved in August 2021.
Beginning in 2025, the rule will require companies to disclose the level of gender and ethnic diversity on their boards of directors and to explain any lack thereof. On August 29, the U.S. Court of Appeals for the Fifth Circuit heard arguments in a case seeking to vacate the SEC’s order approving the rule.
The petitioners, the Alliance for … Read more
What a long, strange trip it’s been for Twitter shareholders since the company’s November 7, 2013 Initial Public Offering on the New York Stock Exchange.
… Read more
The independence of corporate boards is a serious concern to shareholders and regulators. The influence CEOs have over director appointments accentuates this concern. It is not uncommon to see CEOs appointing directors with personal or business ties (e.g., relatives, friends, or business associates). However, such appointments are likely to invite close scrutiny. CEOs can also use their influence more subtly by strategically nominating independent outside directors with certain expertise, knowledge, experiences, and skills.
Strategic director appointments have received little attention in the literature, which has tended to focus on what makes the board effective (e.g., independence, expertise, and size). In … Read more
This morning, I’d like to return to a theme I’ve touched on repeatedly in speeches throughout my first year on the job, and that is the urgent need to restore trust in our institutions, government, and the legal and regulatory processes. I’ve previously discussed the importance of corporate responsibility, the critical role of gatekeepers, the necessity for proactive compliance and cooperation, and the pervasive – yet unpersuasive – mantra of “regulation by enforcement,” in connection with the trust-building process.
But this morning, I’d like to approach this theme somewhat differently, by sharing some thoughts on how we apply this … Read more
The ability of disclosure rules to provide investors, consumers, and the public with useful information depends largely on how well the rules are enforced. Strong enforcement helps ensure the provision of information and increases companies’ desire for mandatory disclosure. In a new article, we offer a model of mandatory disclosure regulation and enforcement and analyze four essential questions the model raises.
Which firms are willing to disclose voluntarily in the absence of mandatory disclosure?
In his famous article, “Market for Lemons,” Akerlof (1970) argues that markets can collapse because of information asymmetry. Persistent information asymmetry where, for example, no seller … Read more
Nations and businesses often compete and clash. But the war on business has escalated in recent years as nation-states and non-state actors target specific businesses with sanctions and recriminations and new intensity and methods. The many legal, economic, and social implications are serious.
In a recent article, I examine the contemporary war on business, its growing importance to corporate and national affairs, and the pressing need for better, pragmatic approaches to understanding and addressing these rising threats.
Even before the global business community responded to the Russian invasion of Ukraine, the world witnessed this new mode of business warfare. … Read more
One of the recent central themes of the Office of the Chief Accountant has been that high-quality audits are foundational to the trust that underlies capital markets. High-quality audits protect investors, instill shareholder confidence in the quality of the financial information, and enable public companies to raise capital efficiently. The investor protection afforded by high-quality audits is as important to U.S. investors in foreign companies that participate in the U.S. capital markets as it is for investors in domestic companies. In fact, it could be argued that the additional information barriers that may exist when investing in … Read more
Many of the world’s largest firms have recently announced their intention to reduce carbon emissions over the coming decades. The financial sector claims to have mobilized over $130 trillion in support of the net zero transition, and 33 percent of the G20’s largest companies by revenue have set a net zero target in alignment with the goals of the Paris Agreement. Even Shell, an oil supermajor and for a long time a bête noir of climate campaigners, has set itself the target to “become a net-zero emissions energy business by 2050.”
Against a backdrop of lackadaisical climate policy, that sounds … Read more
The SEC rule requiring a universal proxy card in director election proxy fights becomes effective today [September 1]. The resurgence of activism is already in progress, and the universal proxy card may significantly facilitate some proxy contests in which an activist is seeking to elect one or more directors to a company’s board to replace incumbent(s). It will also affect proxy contest strategies, tactical considerations and the behavior of proxy advisory firms assessing competing director slates. As stated by ISS in its report on the universal proxy card:
The indisputable fact about the universal proxy card (UPC) is that it … Read more
In March 2022, the Securities and Exchange Commission (SEC) proposed a rule that would require publicly traded companies to provide investors with various climate-related disclosures (the Proposal).The rule has generated extensive debate and the SEC has received more than 4,000 substantive comment letters and more than 10,000 form letters to date. Commenters have raised a variety of concerns about the Proposal, including the extent to which the SEC has the authority to mandate climate-related disclosure. Since the Supreme Court’s June 2022 ruling in West Virginia v. EPA, some commentators have also asserted that the Proposal runs afoul … Read more
On August 25, 2022, the U.S. Securities and Exchange Commission (SEC) adopted final rules requiring public companies to disclose the relationship between the executive compensation actually paid to the company’s named executive officers (NEOs) and the company’s financial performance. The final rules implement the “pay versus performance” disclosure requirements mandated by Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted in 2010. The SEC issued proposed pay-versus-performance rules in 2015 and reopened the comment period on the proposed rules in January 2022. There are a number of important differences between the proposed rules (summarized here) … Read more
The crackdown on Tornado Cash, a crypto mixing service, continues a recent trend of regulators using blacklisting as a key enforcement tool. Tornado Cash was blacklisted by the Treasury Department for allegedly helping to launder over $7 billion in cryptocurrencies, some of which are believed to be the proceeds of cybercrimes, and Americans can no longer legally use Tornado Cash as a result. But U.S. authorities are far from being alone in usubg blacklisting as a regulatory tool. Blacklisting individuals, business entities, and even autonomous codes, as was the case with Tornado Cash, to achieve policy outcomes, has also … Read more
On August 16, President Biden signed the Inflation Reduction Act of 2022 (the “IRA”) (see our prior memo), which imposes a new 15% corporate book minimum tax (the “BMT”). The BMT is imposed, effective for taxable years beginning after December 31, 2022, on the “adjusted financial statement income” (“AFSI”) of large U.S. corporations (other than S‑corporations, REITs and regulated investment companies) with average AFSI in excess of $1 billion over the preceding three-year period. Adjusted financial statement income is net income in a corporation’s audited GAAP financial statements filed with the SEC (or certain other specified financial statements) subject … Read more
As institutional investors know, a vast majority of shareholder related class actions take place in the United States. This is accurate in terms of both newly filed cases and settlements.
However, non-North American shareholder litigation is significantly important to investors looking to recoup lost assets, while at the same time keeping companies accountable for violations of local securities laws. In fact, the largest non-North American settlement of all-time was resolved earlier in 2022… a €1.4 billion settlement with Steinhoff International.
Here is a look at five current non-North American cases investors should keep their eye on:
The A2 Milk
… Read more
Since 2020, new retail investors have flooded the securities markets, opening a record number of new brokerage accounts. Due to the ease of investing through commission-free trading apps and the ability to purchase fractional shares, a broader segment of the population is beginning to partake in direct investing. A 2020 FINRA-NORC study of new retail investors found that there has been an increase in the racial and ethnic diversity of new investors. More specifically, new investors in 2020 were 58 percent White, 17 percent African American, 15 percent Hispanic/Latino, and 10% percent Asian. By contrast, a 2019 study found that … Read more
Since President Biden issued his July 2021 Executive Order on Competition, the antitrust agencies have made broad policy statements promising more aggressive enforcement and have initiated a number of high-profile enforcement actions. Rather than establishing a record of success, the primary effect has been to create uncertainty, as the agencies struggle with institutional constraints and have yet to achieve groundbreaking victories in court. Still, the FTC and DOJ do not appear deterred.
Background on President Biden’s Executive Order on Promoting Competition in the American Economy
On July 9, 2021, President Biden issued a sweeping proclamation on competition in the American … Read more
More shareholder resolutions were filed in the 2022 proxy season than in the previous year, with approximately 932 environmental, social, and governance shareholder proposals submitted at U.S. companies so far, compared to 903 proposals submitted in 2021, according to ISS Voting Analytics data. The number of proposals focusing on environmental and social issues is estimated to have risen from 500 submissions in 2021 to approximately 588 proposals in 2022. Though many proposals have since been withdrawn, many have been or will be voted on. According to data from ISS Corporate Solutions, 578 shareholder resolutions on ESG issues have either been … Read more
Investors allocate capital to mutual funds based on past performance and the perception of whether a fund can “beat the market.” In fact, mutual fund companies explicitly promote their funds based on these factors, knowing that investors will respond. The Securities and Exchange Commission (SEC) requires mutual funds to disclose at least one “appropriate” broad-based market index to which they compare their past performance. The stated rationale for this requirement is to help investors evaluate “how much value the management of the fund added by showing whether the fund outperformed or underperformed the market.” As with all SEC rules … Read more
On August 26, the Securities and Exchange Commission adopted two amendments to the rules governing its whistleblower program. The first amendment expands the circumstances where the SEC can pay whistleblowers for their information and assistance in legal actions not brought by the commission. The second affirms the SEC’s authority to consider the amount of a payment for the limited purpose of increasing but not reducing it. Commission Chairman Gary Gensler’s statement supporting the amendments is available here. Commissioners Hester Peirce and Mark Uyeda opposed the amendments, and their statements are available here and here.… Read more
On July 21, 2022, the U.S. Securities and Exchange Commission (SEC) commenced the first ever lawsuit charging insider trading in cryptocurrency markets. A former employee of Coinbase – a major cryptocurrency exchange – together with his brother and a friend, were arrested and charged with wire fraud in connection with a scheme to commit insider trading. The three men allegedly used confidential information about coins that were to be listed on the Coinbase exchange prior to the official listing announcement. If found guilty, they could face prison sentences of up to 20 years.
In a new study, we show … Read more
Today [August 25], the Commission voted to adopt a rule requiring certain public companies to disclose information regarding their executives’ compensation and how such compensation relates to the company’s financial performance. I was pleased to support this rule—so-called “pay versus performance”—because it will strengthen the transparency and quality of executive compensation disclosure to investors.
In 2010, Congress under the Dodd-Frank Act directed the Commission to provide clear disclosure to investors on the relationship between companies’ executive compensation actually paid and financial performance. We proposed a rule in 2015 to implement this provision and reopened the proposal in January of this
… Read more
Can you name 10 corporate criminals? Bernie Madoff, Martha Stewart, and Jeff Skilling don’t count – they are individuals, not businesses. How about just five? Three? It’s surprising the task should be so difficult. Corporate crime inflicts upwards of 20 times more economic damage each year than all street crime. Brand-name corporations find themselves on the wrong side of the law for everything from accounting fraud to homicide to narcotics dealing. Yet many people, including most law students and even some law professors, don’t even know that corporate criminal law exists.
In a forthcoming paper, we … Read more
In 2021 and 2022, as the market continued to focus increasingly on environmental, social, and governance (“ESG”) issues, government financial regulators across many independent agencies strongly indicated that increased enforcement relating to ESG is on the horizon, while private plaintiffs filed novel securities class actions based on ESG issues.
Given the rapid development of legal ESG issues in the financial services industry, market participants must remain cognizant of the potential legal risks relating to ESG, and take adequate precautions to protect themselves against both government investigations and private civil litigation. This article analyzes the emerging framework of ESG regulation and … Read more
Why should corporate managers comply with international law? International agreements, customary international law, and non-binding recommendations are sources of norms that, if adopted, could address many of the harms that corporations create for society and the planet.
Corporations are increasingly exposed to a variety of reputational, legal, regulatory, and other risks when they operate in a manner inconsistent with society’s expectations. Environmental, social, and governance (ESG) issues are priorities at many corporations, but managers struggle with how to implement them. Fortunately, many international laws offer the blueprint for ESG strategies. For example, the United Nations Guiding Principles recognize the “corporate … Read more
Responses to financial crises can have the unfortunate effect of creating “zombie” firms, companies whose operating profits are insufficient to cover their debt service. These companies would probably have gone bankrupt without the forbearance of banks or regulators or other types of government or lender support, but their rise reduces economic productivity, limits healthy firms’ growth, and deters the creation of new firms (Caballero et al, 2008; McGowan, Andrews, and Millot, 2017).
The question of what factors enable certain zombie firms to survive while others fail, however, has not yet been addressed in literature. I contend that not all zombies … Read more
For all the press lamenting the “crypto winter” and urging long-term legislative overhaul, there has not been sufficient attention to how existing regulatory tools can be employed to address some of the key risks and vulnerabilities in the current crypto landscape. Industry leaders and regulatory authorities should engage with open minds and a willingness to discuss practical actions to mitigate current risks in the system while comprehensive legislation may yet be years away. In particular, we recommend that U.S. financial regulators consider the following measures — most of which would not require new federal legislation — to promote innovation and … Read more
Activist hedge funds will soon likely have greater leverage in proxy contests, thanks to a new rule from the Securities and Exchange Commission. But will that benefit shareholders who care about long-term value? Our study suggests that it will – sometimes.
In November 2021, the SEC adopted a universal proxy rule that allows investors to choose the combination of candidates they vote for in a contested election. This differs from the existing rule, which requires them to choose between the company’s and a dissenting shareholder’s proxy cards.
The new rule lowers the barriers for nominations from traditional activists as well … Read more
In late March, Argentina and the IMF agreed on a new arrangement that would enable Argentina to avoid falling into arrears on the IMF’s 2018 loan. However, the agreement was reached only after protracted and tortuous negotiations that dragged on for at least 18 months and concluded only at the last minute before a de facto March deadline.
In a new two-part article, I discuss the many twists and turns of the process and review the major substantive policy differences between Argentina and the IMF as well as the political considerations involved in the negotiations.
In August 2020, Argentina restructured … Read more
On August 5, 2022, the Second Circuit held that individuals claiming they were terminated in retaliation for protected whistleblower activities under Sarbanes-Oxley must prove that their employer acted with retaliatory intent. Murray v. UBS Securities LLC, No. 20-4202 (2d Cir.). The decision raises the bar for plaintiffs to plead and prove a claim under Sarbanes-Oxley’s anti-retaliation provision, 18 U.S.C. § 1514A, and may reduce the cost to settle such claims. The decision also creates a split with the Fifth and Ninth Circuits, which previously held that retaliatory intent is not an element of a section 1514A claim, and raises … Read more
The Fortune 500 CEO survey in 2021 found that two-thirds of interviewed CEOs consider cybersecurity risk their greatest concern, far greater than the risks presented by political instability or climate change. They are right to be concerned, particularly in the context of mergers and acquisitions (M&A), where the process of migrating and integrating data between merging firms can make them particularly vulnerable to sophisticated cyber terrorists. (IBM, 2019). IT breaches during that process could significantly reduce the gains expected from a deal.
Furthermore, threats to successful deal completion may arise from past cybersecurity weaknesses, as highlighted in two recent … Read more
Last week, the CFPB took three actions demonstrating the agency’s continued focus on technology companies and personal financial data protection. First, the CFPB issued an interpretive rule explaining the CFPB’s view that many digital marketing providers may be “service providers” subject to the CFPB’s supervisory authority under the Consumer Financial Protection Act (“CFPA”), including its authority to address unfair, deceptive, or abusive acts or practices (“UDAAP”). Second, the CFPB issued a circular explaining that insufficient data protection or information security by covered persons and service providers is an unfair act or practice under the CFPA. Finally, the CFPB announced an … Read more
Stock-option backdating, the practice of changing the reported date of a stock-option grant to an earlier date, proliferated in the 1990s and early 2000s, with nearly one-third of public corporations engaging in it, according to some estimates (Heron and Lie, 2009). The discovery of it left many to wonder how such a practice could spread undetected so widely, for so long. Many believe it spread through social ties among executives, but that explanation seems lacking. Most executives who backdated were not versed in accounting rules, and the practice required falsifying several separate, formal documents – including the firm’s quarterly and … Read more
Since the passage of Regulation Fair Disclosure, managers have increasingly met privately with investors. During these meetings, investors gather useful information by seeking managers’ feedback, pursuing a deeper understanding of publicly available information, and inquiring about company strategy. That information can help them better interpret subsequent disclosures. In a new study, we investigate whether investor activity around earnings announcements is consistent with the leveraging of a mosaic of soft information obtained from private meetings and subsequently forecasted earnings announcements.
We compare firms that issue stand-alone management guidance in conjunction with private investor meetings with a sample of firms that issue … Read more
Announced shareholder activist activity increased relative to 2020. The number of public activist actions (76 vs. 63), activist investors taking actions (48 vs. 41), and companies targeted by such actions (69 vs. 55) each increased. Suchlevels of activism are comparable to those found prior to the market disruption caused by the COVID-19 pandemic, as reflected in public activist actions in 2019 (76 vs. 75), activist investors taking actions (48 vs. 49), and companies targeted by such actions (69 vs. 64). The period spanning January 1, 2021 to December 31, 2021 also saw several campaigns by multiple activists targeting a single … Read more
Despite the dramatic increase in corporate-sustainability disclosure in recent years, the absence of uniform reporting standards has prompted concern among investors and companies and led to inconsistent disclosure practices, deceptive green marketing, and a lack of useful information. To better understand the role of reporting standards, we examine companies’ voluntary adoption of sustainability standards of the Sustainability Accounting Standards Board (SASB).Specifically, in a new paper, we examine what factors prompt companies to adopt SASB standards and whether standards adoption is associated with real effects on fundamental ESG performance.
Our interest in voluntary adoption of SASB standards stems from … Read more
In the last few weeks, two bills with the potential to bring needed regulatory certainty to the U.S. digital asset industry were introduced in the Senate with solid bipartisan backing.
In June, Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) unveiled the Lummis-Gillibrand Responsible Financial Innovation Act, and in August, Senators Debbie Stabenow (D-MI) and John Boozman (R-AR) announced they would introduce the Digital Commodities Consumer Protection Act of 2022, with support from Senators John Thune (R-SD) and Cory Booker (D-NJ).
Each bill would bring much needed clarity to the regulatory landscape in part by strengthening the role … Read more
Bankruptcy-remote structuring – structuring an entity to protect it from internal or external factors that might prevent it from paying its debts as they come due or make it the subject of a bankruptcy case – is crucial to a wide range of important business and financial deals. Investors in securitization, project finance, covered bonds, oil-and-gas and mineral production payments, and other types of structured finance transactions – valued at many trillion of dollars of securities outstanding – require both the entity issuing securities and the transaction itself to be structured as bankruptcy remote. Public service commissions and other regulators … Read more
On August 31, 2022, the universal proxy rules adopted last year by the Securities and Exchange Commission (SEC) will go into effect. The rules require proxy cards distributed by public companies and activist shareholders in a contested director election to include both sides’ director nominees, so that shareholders can “mix and match” nominees from the company’s and dissident’s slates. In this post, I discuss possible changes to customary forms of public company bylaws to address issues likely to result from the implementation of the new universal proxy rules.
Mandatory universal proxy will have significant repercussions for activist campaigns at … Read more
In the last few years, there has been a dramatic increase in shareholder engagement on environmental and social issues. Consider two examples from 2021. Eighty-one percent of DuPont shareholders approved a proposal requiring the company to disclose how much plastic it releases into the environment each year and to assess the effectiveness of DuPont’s pollution policies. Sixty-four percent of ExxonMobil shareholders approved a proposal requiring the company to describe “if, and how, ExxonMobil’s lobbying activities … align with the goal of limiting average global warming to well below 2 degrees Celsius…”
It is hard to explain this behavior using the … Read more
The California Secretary of State has appealed a decision by the Los Angeles County Superior Court striking down the second of California’s two board diversity laws, which required all publicly traded companies headquartered in California to include a minimum number of female directors. The appeal will challenge the court’s finding that the board diversity legislation violates the Equal Protection Clause of the California Constitution because its classification of director candidates based on gender does not further a compelling government interest.
In addition, the same court—acting through a different judge—has also overturned California’s other board diversity statute, which required boards of … Read more
Investors generally expect companies to make a successful and profitable debut on the stock market with their initial public offering (IPO). However, some stock market launches fall short: The price of shares in Deliveroo’s $2.8 billion IPO in 2021, for example, fell by more than 26 percent when launched on the London Stock Exchange, and the price of Uber shares issued in its $75.46 billion IPO in 2019 dropped, 7.6 percent after their first day of trading on the New York Stock Exchange.
In 2021, around $143 billion worth of shares were issued in U.S. IPOs, but more than 25 … Read more
For over 45 years, Delaware law has permitted directors of Delaware corporations to be exculpated from personal monetary liability to the extent such protections are set forth in the certificate of incorporation, subject to certain exceptions. However, such protective statutory provisions did not reach officers. As contemplated in our April 2022 memorandum, Delaware has now adopted important amendments to Delaware’s General Corporation Law that would expand the right of a corporation to adopt an “exculpation” provision in its certificate of incorporation to cover not only directors (as has been allowed and widely adopted since 1986, following Smith v. Van … Read more
Shareholders have increasingly taken the lead in pushing for corporate sustainability. In 2021, for example, 20 percent of U.S. environmental and social shareholder proposals won over 50 percent of shareholder support, while in 2016 only 3 percent of such proposals were approved by a majority of shareholders.  Investors have also strengthened their private engagement efforts, with collaborative groups like Climate Action 100+ urging firms to make their operations more environmentally sustainable. Yet an important question persists: How relevant are these stewardship activities to the financial performance of target firms?
In a new working paper, we use an extensive global … Read more
Here are the key takeaways from the Basel Committee’s final Principles for the Effective Management and Supervision of Climate-Related Financial Risks (the “Basel Principles”).
The core elements of the Basel Principles align closely with proposed principles from the OCC and FDIC
- The Basel Principles1 align closely with the climate-related risk management principles proposed by the Office of the Comptroller of the Currency (the “OCC Proposal”)2 and the Federal Deposit Insurance Company (the “FDIC Proposal”).3
- The Basel Principles are part of the Basel Committee on Banking Supervision’s (the BCBS or the “Basel Committee”) work of assessing how the
… Read more
On July 7, 2022, the U.S. Department of Treasury (USDT) published a fact-sheet on the regulation of digital assets(a.k.a. crypto-assets) in which it emphasized the need for global cooperation. However, this fact-sheet is only a drop in an ocean of mostly uncoordinated crypto-regulation initiatives, both domestically (e.g., presidential executive order, a bi-partisan bill submitted to Congress, and diligent SEC enforcement) and abroad (e.g., final steps toward a harmonized regulation in the EU and several declarations by individual countries).
The current wave of crypto-regulation announcements aims to eliminate the confusion that has dominated the cryptomarket since its emergence. In … Read more
How do a few dozen SEC and CFTC staffers sift through the avalanche of tips submitted under Dodd-Frank whistleblower “bounty” programs to determine which ones to investigate?
The answer: They don’t.
Using new data obtained from both agencies under the Freedom of Information Act, my new working paper demonstrates that the tip-triage function has been outsourced to a group of well-connected, repeat-player, private whistleblower lawyers who are exempt from any meaningful transparency, regulation, or public accountability.
Key findings from the analysis, which includes all successful whistleblowers from the programs’ inception through 2020, include the following:
- Lawyers Dominate – Both the
… Read more
European Union leaders have reached a provisional political agreement on a revised Corporate Sustainability Reporting Directive (“CSRD”) that would introduce more detailed sustainability reporting requirements for all “large” EU companies and companies with securities (including low denomination debt securities or depositary receipts) listed on a regulated EU market. “Large” companies are those that meet at least two of the following: (i) total balance sheet exceeding €20 million, (ii) annual net turnover exceeding €40 million and/or (iii) average number of employees exceeding 250. Under the revised text published on June 30, 2022, non-EU companies would also be required to … Read more
Among those who study corporate financial distress and reorganization, the notion that senior lenders are in control is deeply ingrained. Celebrated papers in the law and corporate finance literatures attribute lender influence during periods of distress to blue-sky contracting practices. When extending credit, senior lenders take a blanket lien on the borrower’s assets, and the borrower agrees to strict financial maintenance and other covenants. The covenants are designed to hem in the borrower. If its performance declines or it wants to pursue new opportunities that materially alter risk, the borrower has to renegotiate. Lenders use renegotiations to force changes … Read more
On July 15, 2022, the Second Circuit held in SEC v. Rio Tinto plc, that the Supreme Court’s ruling in Lorenzo v. SEC did not abrogate the rule in the Second Circuit that alleged misrepresentations and omissions cannot be the “sole basis” for liability under Rule 10b-5(a) and (c).
In Lorenzo, the Supreme Court held that a person who disseminates materially misleading statements with the intent to defraud investors can be held primarily liable under Section 17(a)(1) of the Securities Act, Section 10(b) of the Securities Exchange Act, and SEC Rule 10b-5(a) and (c), … Read more
In Adolf Berle’s famous 1954 essay, “Corporate Capitalism and The City of God,” certain passages that once seemed musty and redolent of a bygone era are now eerily timely. Like current critics, Berle chides corporate leaders who think they can simply mind their own business, oblivious to larger social concerns. “For the fact seems to be that the really great corporat[e] managements have reached a position for the first time in their history in which they must consciously take account of philosophical considerations,” Berle wrote. “They must consider the kind of community in which they have faith, and which … Read more
Access to corporate information plays a pivotal role in stockholder litigation. One key to that access is stockholders’ statutory right to inspect a corporation’s books and records prior to filing litigation, enshrined in the Delaware General Corporation Law’s Section 220. In the context of derivative actions – i.e., actions brought by a stockholder on behalf of a company – Section 220 takes on an even greater importance. In order to maintain standing to pursue those claims, the stockholder plaintiff either must have made a wrongfully refused demand of the relevant board that it institute litigation, or must proceed on a … Read more
Today [July 29], the Commission unanimously voted to re-propose amendments to Rule 15b9-1 regarding when broker-dealers are required to register with the Financial Industry Regulatory Authority (FINRA). These amendments would cause some of the most active participants in our equity and fixed-income markets to be required to register with FINRA. I was pleased to support these amendments because, if adopted, they would modernize and improve market oversight for regulators.
Rule 15b9-1 was first put in place in 1965 and expanded in 1976, 46 years ago. The rule set forth an exemption designed for certain exchange floor members and other regional,
… Read more
This post provides an overview of shareholder proposals submitted to public companies during the 2022 proxy season, including statistics and notable decisions from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) on no-action requests.
I. Summary of Top Shareholder Proposal Takeaways from the 2022 Proxy Season
In November 2021, the Staff issued Staff Legal Bulletin No. 14L (Nov. 3, 2021) (“SLB 14L”). In SLB 14L, the Staff rescinded Staff guidance and reversed no-action decisions published during the tenure of former Division Director Bill Hinman, upending the Staff’s recent approach to the application … Read more
On July 19, 2022, in the Twitter v. Musk litigation, Chancellor Kathaleen McCormick presided over what was likely the most widely observed hearing on a motion to expedite in the Delaware Court of Chancery’s history. While deal bust-ups are front page fare for the financial press, the high profile of this case brought the Court of Chancery further into the national consciousness than usual (though who among us hasn’t asked “what is a chancery?”). On the day of the hearing, the public access telephone line was, indeed, “lit,” hitting its maximum capacity with merger arbs (and other interested … Read more
On July 21, 2022, the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) each brought insider trading charges against a former Coinbase product manager, his brother and a close friend for using material non-public information (MNPI) to purchase a variety of crypto assets prior to announcements by Coinbase that the assets would be listed on the company’s platform.
This is the first time an insider trading case has been brought by the DOJ or SEC relating to fungible tokens, and comes on the heels of the first-ever DOJ indictment for alleged insider trading related to non-fungible tokens … Read more
Every pundit and commentator has by now analyzed the ongoing battle between Elon Musk and Twitter over Musk’s attempt to walk away from their deal. Almost all of these evaluations have rated Twitter as having a considerably stronger case, because (among other reasons) Musk did no due diligence, was well aware of the “bot” (or fake user) problem, negotiated no contractual protections directly addressed to these risks, and generally behaved inequitably, disparaging Twitter and toying with the SEC’s rules. Okay, but that raises an interesting puzzle: If the facts favor Twitter, and if Musk’s offer was for $54.20 a share … Read more
Good afternoon. Thank you, Paulita and Rajib, for your gracious invitation and kind welcome to this year’s program on current issues and trends in Investment Management.