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

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

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

SEC Commissioners Comment on Chair Gensler’s Regulatory Agenda

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

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

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

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

Cleary Gottlieb Discusses New York’s New Antitrust Law

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

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

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The Psychology of Taxing Capital Income

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

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

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

Creating Controversy in Proxy Voting Advice

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

SEC Chair Speaks at Meeting of Investor Advisory Committee

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

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

At the heart of our mission and our work

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

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

Skadden Discusses Blowing the Whistle Under EU Law

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

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

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

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

SEC Chair Talks Finance and Technology in Equity Markets

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

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

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

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Acquisition Flippers and Earnings Management

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

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

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

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

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

We focus on three critical assumptions about maximizing … Read more

ISS Discusses Liquidity Behavior in the S&P 500

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

Administrative Crimes: A Qualified Defense

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

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

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

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

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Aggressive Boards and CEO Turnover

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

How Corporate Governance Codetermination Works in Practice

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

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

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

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

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

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Law Enforcement’s Lochner

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

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

Cleary Gottlieb Discusses EC’s Corporate Sustainability Reporting Directive

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

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

The CSRD … Read more

Common Ownership and the Decline of the American Worker

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

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

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

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

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

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

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

SEC Commissioner Crenshaw Speaks at Small Business Forum

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

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

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

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

Joining the S&P 500 … Read more

The History and Revival of the Corporate Purpose Clause

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

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

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

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

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

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

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

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

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

We summarize below Nasdaq’s rule … Read more

Corporate Purpose and Acquisitions

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

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

SEC Commissioner Lee Speaks on Leveraging Regulatory Cooperation

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

The issues on the agenda today are all critically important

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Corporate Venture Capital, Disclosure, and Financial Reporting

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

SEC Chair Gensler Speaks at FINRA Annual Conference

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

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

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Mitigating Gig and Remote Worker Misconduct

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

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

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

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

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

The SPAC is typically led … Read more

Is Everything Securities Fraud?

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

Cahill Gordon Discusses SEC Rules Under Holding Foreign Companies Accountable Act

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

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

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

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

ISS Revisits the Performance of ESG Screened Indexes During the Pandemic

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

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

  • a

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Investor Relations, Activism, and Engagement

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

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

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

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

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

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COVID-19 Isolation, Managerial Sentiment, and Corporate Policies

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

The Real Merger Gains: Correcting for Partial Anticipation

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

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

Skadden Discusses SEC and ESG Disclosure

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

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

Who Will Regulate Central Bank Digital Currencies?

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

What Is a Central Bank Digital Currency?

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

Davis Polk Discusses Who Can Have a Federal Reserve Master Account

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

The Efficacy of PCAOB Operational Decision Making

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

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

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

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

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

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

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

Skadden Discusses Antitrust Enforcement in Biden Administration

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

How Open Banking May Affect the Legality of Screen Scraping

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

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

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

How Financial Misconduct by Institutional Investors Affects Corporate Social Responsibility

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

Skadden Discusses Closer Scrutiny of Corporate Conduct Under Biden

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

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

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

Bankruptcy Shopping: Domestic Venue Races and Global Forum Wars

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

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

WallStreetBets, GameStop, and the Rise of ESG Retail Investors

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

Debevoise & Plimpton Discusses UK Global Anti-Corruption Sanctions Regime

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

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

Debt, Control, and Collusion

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

Investors Seek Answers on Sovereign Climate Performance

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

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

Contractual Stakeholderism

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

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

“Public” Mutual Funds

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

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

A Call for Reflection on Sustainable Corporate Governance

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

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

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

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

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

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

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

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

Why Board Diversity and the Nasdaq Rule Requiring It Make Sense

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

Paul Weiss Discusses Vertical Mergers and Investor Exit Strategies

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

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

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

Davis Polk Discusses Insights from ABA’s Spring Antitrust Meeting

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

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

Can Excess CEO Confidence Increase Risk of Corporate Failure?

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

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

Skadden Discusses DOJ’s Use of FIRREA as Enforcement Tool

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

The Rise of Dual-Class Stock IPOs

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

Latham & Watkins Discusses ESG Considerations for Cryptocurrency

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

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

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

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

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

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

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

Why Unions Lose Elections

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

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

Shearman & Sterling Discusses How UK Banking Is Affecting Global FinTech

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

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

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

Sidley Discusses SPAC Litigation in Delaware Courts

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

Taming Unicorns

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

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

Skadden Discusses New EU Merger Regulation Guidance

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

Summary

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

Read more

The Underside of Hedge Fund Activism: Looting the Pension Fund

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

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

O’Melveny & Myers Discusses the Legal Challenges of NFTs

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

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

Repurposing the Corporation Through Stakeholder Markets

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

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

SEC Speaks on Accounting and Reporting Considerations for SPAC Warrants

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

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

Read more

SPACs, IPOs, and Liability Risk Under the Securities Laws

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

Read more

Ownership Piercing

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

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

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

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

What Can Autonomous Corporations Teach Us About Legal Personhood?

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

Cravath Discusses Board and Management Responses to ESG Considerations

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

The Banker Removal Power

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

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

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

The Darwinian Dynamics of Contracting

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

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

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

In March 2020, … Read more

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

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

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

Latham & Watkins Provides Beginner’s Guide to NFTs

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

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

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

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

Quinn Emanuel Discusses SPAC Litigation Risks

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

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

Covid and Cultural Due Diligence in M&A          

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

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

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

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

Read more

Regulating SPACs — Before It’s Too Late

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

Latham & Watkins Discusses New CFTC Climate Risk Unit

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

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

Discretionary Decision-Making and the S&P 500 Index

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

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

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

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

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

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

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

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

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

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

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

Much of the concern … Read more

How the Covid-19 Pandemic Affected the Cryptocurrency Market

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

Paul Weiss Discusses How to Mitigate SPAC Litigation Exposure

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

Prosocial Antitrust

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

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

Wilson Sonsini Discusses SEC Focus on Climate Change Disclosures

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

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

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

GameStop, Social Media, and the Phenomenon of Expressive Trading

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

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

Gibson Dunn Discusses Mandatory Corporate Human Rights Due Diligence

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

Developments Within Europe

France

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

Regulating Digital Currencies: Towards an Analytical Framework

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

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

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

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

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

Short Sellers, Short Squeezes, and Securities Fraud

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

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

SEC Commissioner Speaks at Asset Management Advisory Committee Meeting

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

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

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ESG Incidents and Shareholder Value

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

Latham & Watkins Discusses Whether NFTs Are Securities

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

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

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

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

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

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

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

Why M&A Rumors Cause a Dip in Firm Productivity

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

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

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

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The Management Case for Inclusionary Corporate Purpose

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

Latham & Watkins Discusses Virginia Consumer Data Protection Act

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

Scope

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

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

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

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

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

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

The Agency Costs of Sustainable Capitalism

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

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

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

The Lowdown on SPACs

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

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

What Is a SPAC?

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

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

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

Toward a Better Coordinated Regulatory Response to Cryptoassets

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

Patterson Belknap Discusses Consumer Data Privacy in New York

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

Market Myopia’s Climate Bubble

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

Yet while the consensus (and evidence) … Read more

Skadden Discusses Trends in Securities Class Action Filings

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

The moderate … Read more

Stealth Acquisitions and Product Market Competition

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

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

Davis Polk Discusses New SEC Climate and ESG Enforcement Task Force

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

Materiality

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

Distinguishing Social Enterprise Lawyering

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

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

Commissioners Discuss SEC’s Enhanced Climate-Change Efforts

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

The Division

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Corporate Venture Capital

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

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

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

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

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

Liquidity, Pledgeability, and the Nature of Lending

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

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

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

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

Securities Regulation and Class Warfare

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

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

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

The Government Tools for Responding to Market Distress

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

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

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

The … Read more

How Department of Labor Rules on ESG Leave Undirected Votes Adrift

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

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

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

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

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

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

Leading public officials … Read more

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

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

How the Litigious Bird Caught the (Banque) Worm

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

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

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

Private Company Lies

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

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

Gibson Dunn Offers 2020 Year-End Securities Litigation Update

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

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

  • Federal securities filings decreased by approximately 22%

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Shareholder Monitoring and Discretionary Disclosure

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

Skadden Discusses FTC Moratorium on Early Terminations of HSR Waiting Periods

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

Key Takeaways

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

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Why Some Covid-19 Mitigation Strategies Fail

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

King & Spalding Discusses Takeaways from GameStop

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

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

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

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

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

Skadden Discusses “The Year of the SPAC”

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

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

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

The Myth of Dual Class Shares: Lessons from Asia

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

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

Acting FTC Chair Slaughter Speaks on Protecting Privacy and Data Security

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

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

How Regulatory Stress Tests Affect Bank Lending

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

Gibson Dunn Discusses EU Developments in Corporate Human Rights Due Diligence

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

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

Mandatory Corporate Human Rights Due Diligence: EU Developments

What exactly … Read more

The Voting Premium of Stock

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

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

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

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

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

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

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

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

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

The Lost Lessons of Shareholder Derivative Suits

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

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

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

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

Read more

Why Would Passive Funds Invest in Corporate Governance?

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

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

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

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

Game Over: How Best to Regulate Betting on Wall Street

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

Orrick Discusses SEC’s Recent Whistleblower Program Amendments

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

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

States Should Still Be Prepared to Borrow

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

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

Latham & Watkins Looks Back at Digital Asset Regulation in 2020

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

Lessons from India’s Struggles with Corporate Purpose

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

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

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

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

The Financialization of Corporate Governance

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

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

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

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

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

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

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

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

A Reddit Rebellion in the Robinhood Era

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

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

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

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

Addressing ESG in 2021: Who Is in Charge?

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

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

Latham & Watkins Discusses Digital Asset Regulations of 2020

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

How Scrutinizing Honest Managers Encourages Earnings Management

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

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

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

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

How Principal Reduction Through Mortgage “Cramdown” Affects Household Distress

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

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

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

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

The Causes and Consequences of Increased Cross-border Shareholder Activism

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

Overview

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

Debevoise & Plimpton Discusses UK’s Autonomous Sanctions Regime

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

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

UK Sanctions Legislation

The UK’s Sanctions and Money Laundering Act Read more

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

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

The Listings Wave

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

Paul Hastings Discusses Proposed Cyber Incident Reporting Rule for Banks

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

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

How Material Are Disclosures in Annual Reports?

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

Interestingly, firms are not required to … Read more

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

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

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

The Case for Prudential Regulation of the Litigation Finance Market       

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

Exploring the Shadows of Litigation Finance

Here’s a familiar story for litigators. A client calls you with a strong legal claim, but she can’t afford to pay your hourly rates. And your firm won’t let you take the case on contingency. You feel hard-pressed to tell your client to look elsewhere.

Enter litigation finance: the practice where a third party provides capital to a litigant or law firm in connection with a legal claim, frequently to help claimholders finance their lawsuits – in return for a share of the proceeds from a winning case. Ten or even five years ago, most lawyers and regulators had barely … Read more

The Dark Side of Investor Conferences

Investor conferences are an important component of a firm’s investor relations efforts. Conferences provide managers with the opportunity for face-to-face interactions with investors and analysts. Managers can use these interactions to increase firm visibility and shape external perceptions of the firm’s business operations and strategy. Prior academic research finds that conferences are important information events that are accompanied by positive price and volume reactions, increases in institutional investor and analyst following, and improvements in liquidity. The research does not, however, examine whether these conferences – or investor relations activities more broadly – facilitate managerial opportunism. In a new  paper, we … Read more

Morrison & Foerster Discusses U.S. Treasury Sanctions on Chinese Military Companies

On December 28, 2020, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) issued five new frequently asked questions (“FAQs”) that clarify the scope of Executive Order (“E.O.”) 13959, the basis for OFAC’s new Chinese Military Companies sanctions program. These FAQs define key terms and clarify how OFAC will interpret E.O. 13959’s prohibition against U.S. investment in the securities of Communist Chinese Military Companies (“CCMCs”), which goes into effect on January 11, 2021. In general, like previous sanctions programs, the new FAQs show that OFAC will read commonly used terms … Read more

The Index-Fund Dilemma: An Empirical Study of the Lending-Voting Tradeoff

The future of corporate stewardship – and therefore corporate governance – rests in the hands of a few large institutional investors.[1] Questions of whether these funds have the necessary incentives to pursue stewardship have set off an explosion of research by both legal scholars and economists alike. Some say that funds lack even the basic incentives to vote on value-enhancing corporate governance matters because, while even large benefits diffuse among investors, funds bear the totality of the upfront costs.[2] Others argue that funds – through their common ownership of nearly all public companies – have perverse incentives to … Read more

Cleary Gottlieb Discusses New EU ESG Disclosure Obligations for Financial Services Firms

Over a year ago, on December 29, 2019, Regulation (EU) 2019/2088 on sustainability-related disclosures for the financial services sector (the “Sustainable Finance Disclosure Regulation”, or “SFDR”) entered into force. Just a few months remain before key provisions begin to apply and asset/fund managers and other financial services firms should not delay in preparing for new disclosure requirements.

The SFDR requires European financial firms to consider how sustainability risks are incorporated into their investment decision-making processes, and the extent to which their financial sector remuneration practices are consistent with sustainability concerns.  In short, manufacturers of financial … Read more

What to Do About Poor Corporate Governance at Unicorns

Why are large private companies often characterized by poor corporate governance?  WeWork provides a recent high-profile example.  For reasons that now seem implausible, WeWork attracted billions of investment dollars.  Perhaps it was the company’s “vision” or the sheer personality of its co-founder, Adam Neumann, or maybe there was just too much venture capital money looking for the next big thing.  For whatever reasons, WeWork was valued at $47 billion in January 2019, despite having never turned a profit in a rather traditional business.  By the fall of 2019, the WeWork IPO was cancelled, and the company’s value plummeted to about … Read more

Quinn Emanuel Discusses Director Liability for Successors’ Acts

A great deal of buzz has been generated by the recent decision from the Southern District of New York in In re: Nine West LBO Securities Litigation, No. 20 MD 2941 (JSR) 2020 WL 7090277 (S.D.N.Y. Dec. 4, 2020), with some commentators questioning whether the decision places directors who approve a leveraged buyout at risk of liability for the actions of subsequent boards that occur long after they cease to be directors, or expands directors’ duties beyond maximizing value for shareholders.  See, e.g., Sujeet Indap, Dealmakers warn of chilling effect on buyouts from US court ruling, Financial Times … Read more

How CEO Membership on Outside Boards Affects Managerial Efficiency

CEO outside directorships and their value to companies have been a topic of debate among a wide range of stakeholders, particularly investors, boards, and policy makers. Some argue that CEO outside directorships benefit a CEO’s own firm by opening valuable resources in other boardrooms and the corporate elite and by allowing first-hand insights into successful firm strategies. Others, particularly proxy advisers and some journalists, call connected directors “overboarded,” suggesting that outside directorships consume too much of a CEO’s time while remitting little or no value to the CEO’s own firm. Reflecting that criticism, S&P 500 CEO outside board assignments haves … Read more

Fried Frank Discusses Trump Administration’s Trade Pressure on China and Russia

Throughout December 2020, the Trump administration continued its focus on China and Russia and imposed additional export and investment controls. On December 23, 2020, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) published a final rule to amend the Export Administration Regulations (EAR) and create a new Military End User List (MEU List). A license from BIS is required for exports, reexports, or in-country transfers to persons on the MEU List for certain designated items. On December 18, 2020, BIS added 77 entries to the Entity List, most of which are Chinese entities. These actions follow the … Read more

Shareholder Lawsuits and CEO Turnover Decisions

Shareholder lawsuits have long prompted intense debate. Despite increased corporate democracy and shareholder rights, some commentators argue that shareholder litigation is still a shareholder’s best option to bring about changes. Shareholder litigation can impose personal liability on corporate managers and directors for breach of the duties of care (negligence) and loyalty (conflict of interest). However, there is a collective action problem associated with shareholder lawsuits, and some argue that the principal beneficiaries of shareholder lawsuits are attorneys.

In a recent study, we move the debate on shareholder lawsuits forward by studying the impact of shareholder litigation threats on CEOs’ employment. … Read more

Skadden Discusses Supreme Court Review of FTC Monetary Relief Authority

On January 13, 2021, the U.S. Supreme Court heard a case, AMG Capital Management, LLC v. FTC, that could substantially curtail the primary authority the Federal Trade Commission (FTC) relies on to seek monetary relief from defendants in federal court. For decades, the FTC has used Section 13(b) of the Federal Trade Commission Act of 1914 (FTC Act) to seek billions in restitution and disgorgement in a wide range of actions, including cases concerning telemarketing and online frauds, deceptive business practices, data security and privacy breaches, and conspiracies to monopolize in pharmaceutical markets.

Section 13(b) authorizes the FTC to seek … Read more

The Myth of Corporate Governance

In late 2019, somewhat surprisingly, the Business Roundtable issued a brief statement advocating “a fundamental commitment to all of our stakeholders,” thus ending its decades long singular commitment to shareholder value.

The statement triggered an intense global debate about the purpose of the modern corporation. In academia and in policy circles, new attention is now being paid to whether or not pursuit of profit is the sole obligation of the corporation. Legislation that would mandate a more significant role in corporate governance for stakeholders was introduced by Sen. Elizabeth Warren and may, in light of the commitment of the Biden … Read more

Goodwin Procter Discusses SEC Statement on Custody of Digital Asset Securities

Christmas came early for many in the digital asset community by way of a statement from the U.S. Securities and Exchange Commission (“SEC” or “Commission”) on December 23, 2020 that grants relief in the area of broker “custody” of digital asset securities. The framework laid out by the SEC will operate somewhat like a hybrid no-action letter/safe harbor/pilot program, pursuant to which “special purpose” brokers may follow certain, specific steps and custody digital asset securities during a five-year program period without the risk of facing an enforcement action.

Background

U.S. broker-dealers are subject to a multitude of laws and rules, … Read more

Faithful Fiduciaries Have Nothing to Fear from DOL Investment Rule

Late in the afternoon of the Friday before Election Day, the Department of Labor finalized a rule that requires pension and retirement plan fiduciaries to consider only financial interests when investing plan funds. On its face, the rule seems anodyne. Yet it has provoked a strong negative reaction from fund managers and others who advocate for use of Environmental, Social, and Governance (“ESG”) factors in investing.

This negative reaction is puzzling. Advocates for ESG investing, such as the United Nations and BlackRock’s Larry Fink, argue vociferously that ESG investing makes money while also doing good. The rule requires pension … Read more

Debevoise Discusses Banks and Climate-Change Initiatives

In the United States this past year, growing movements for social, racial and environmental justice, and the impact of an unprecedented health crisis, have coincided with a range of institutions increasing their focus on promoting environmental, social and governance (“ESG”) initiatives as part of their businesses. Banks and other financial institutions are among those undertaking efforts to expand their ESG activities. Notably, some banks are taking these actions despite that, under the law today, they are subject to few if any regulations that promote ESG initiatives. None of the U.S. federal bank regulators, for instance, mandate expansion of ESG-related activities … Read more

Domesticating Foreign Finance

Barclays, Credit Suisse, Deutsche Bank, UBS, and other foreign banks played an outsized role in the 2008 financial crisis that cost U.S. households trillions of dollars of wealth. As credit markets froze, foreign banks’ U.S. offices experienced extreme stress and relied on the Federal Reserve’s emergency lending facilities for survival. After the crisis, policymakers tried to strengthen regulation of foreign banks’ U.S. operations, which account for roughly 20 percent of the U.S. banking system. In my new article, Domesticating Foreign Finance, I contend that the United States’ post-crisis reforms were insufficient and that foreign banks continue to pose unwarranted … Read more

Paul Weiss Discusses Antitrust Enforcement in the Near Term

President-elect Biden has yet to name the officials who will oversee antitrust enforcement in his administration. Therefore, the focus of the administration’s substantive agenda remains to be seen. However, the staffs of the Antitrust Division of the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC) will continue their work as the agencies transition to new leadership. Indeed, the agencies and their career staff can be expected to continue to investigate and prosecute pending cases and receive and review merger filings. Nevertheless, there are certain ways in which the trajectory and pace of the agencies’ work might be … Read more

Regulatory Costs of Being Public: Evidence from Bunching Estimation

Disclosure and internal governance regulations are, along with accounting rules, distinguishing features of the public firm.  Deregulation agendas such as those of the Trump administration typically assume that many regulations on public firms have imposed high compliance costs.  Such arguments are at the center of the debate surrounding the decline in the number of public firms, changes in firm-size distribution and the growth of private equity markets.

Researchers and policy makers have extensively studied the costs and the impact of disclosure and internal governance rules (e.g., SEC, 2011; Coates and Srinivasan, 2014). However, as Leuz and Wysocki (2016) write in … Read more

The Unfinished Business of Regulating Clearinghouses

The Dodd-Frank Act recently celebrated its 10th anniversary, with commentators, policymakers, and scholars joining the celebration by discussing the achievements of the sweeping post-crisis financial reform. Yet Dodd-Frank left critical unfinished business that, if not addressed, could erode the structural foundations of the post-crisis markets: the regulation of clearinghouses.

In a new article, I identify the flaws in the the current regulatory framework for clearinghouses. These flaws polarize rather than align the incentives of clearinghouses’ major stakeholders: the owners – companies such as the Chicago Mercantile Exchange Group, Intercontinental Exchange, and the London Stock Exchange Group – and the … Read more

Ropes & Gray Discusses UK’s National Security and Investment Bill

In November, the UK Government announced a significant and wide-ranging package of reforms that, if adopted, will both recalibrate and expand its existing powers to assess and intervene in mergers and acquisitions on the grounds of national security.

The proposed reforms are set out in the National Security and Investment Bill (the “Bill”) and addition to the Competition and Markets Authority’s mergers framework under the Enterprise Act 2002.

A new Investment Security Unit (the “Unit”), which will sit within the Department for Business, Energy and Industrial Strategy, will be the point of contact for businesses with questions or wishing to … Read more

Passive Exit

Economist Albert O. Hirschman (1970) classically set out the two alternatives facing dissatisfied members of an organization: They can voice displeasure or exit for greener pastures. Hirschman’s model has long explained the tradeoff facing shareholders of a poorly governed firm: Agitate for change or take the “Wall Street Walk” by selling shares.[1] Professor John C. Coffee (1991) showed that large institutional investors have little incentive to voice their concerns to monitor portfolio firms,[2] a trend exacerbated by low-fee “passive”[3] portfolio management (Bebchuk et al., 2017).[4]

While voice is often too costly for passive investors, exit is … Read more

Fried Frank Discusses the New Paycheck Protection Program

On December 27, 2020, the Economic Aid Act (EAA) was signed into law to provide financial relief to small businesses suffering from the impact of the COVID-19 pandemic. The EAA amends the PPP loan program that was established earlier this year under the CARES Act. As before, the PPP loans will be low-interest, forgivable loans for specified purposes, designed to encourage businesses to keep employees on the payroll during the pandemic.

The PPP program established under the CARES Act ended on August 8, 2020. At that time, PPP loans totaling $525 billion had been issued to roughly 5.2 million businesses, … Read more

Pandemic Disclosures: Covid-19 as a “Current Market Condition” for Mutual Funds

What constitutes a “current market condition” that mutual funds are required by SEC regulations to disclose? Current market condition risks arise because of changing market conditions that can affect investment performance.  For some U.S.-registered funds, Covid-19 is prompting new event-specific disclosures. In 2020 Q1-Q3, we see a dramatic increase in public health-related disclosures overall, and the emergence of new Covid-19 and quarantine risk disclosures.

While the SEC hasn’t mandated Covid-19 disclosures or provided guidance to funds (as it has with operating companies), it is clear that funds are not immune to the effects of Covid-19. … Read more

Paul Weiss Discusses SEC Guidance on Disclosure by SPACs

The Staff of the Division of Corporation Finance recently issued CF Disclosure Guidance: Topic 11 – Special Purpose Acquisition Companies (available here). This guidance highlights disclosure considerations for SPACs at both the IPO and business combination stages, with a focus on disclosures around conflicts of interest and the differing economic interests of SPAC sponsors, directors, officers and their affiliates (collectively, “SPAC Insiders”) as compared to the interests of the SPAC’s public shareholders.

IPO Disclosure Considerations

In an effort to elicit better disclosures when a SPAC goes public, the guidance poses questions for SPACs to address in the IPO registration … Read more

Securities Regulation in Cryptoasset Markets: A Cost-Benefit Analysis

Rapid technological innovation over the past five years has created unprecedented opportunities for entrepreneurs – often outside the world of traditional finance and capital markets. Cryptoassets, for example, may prove to be socially beneficial tools for enabling entrepreneurs to more efficiently raise capital, and making sure those and other welfare-maximizing financial innovations succeed has become paramount for researchers and policymakers. In a recent paper, The Leviathan of Securities Regulation in Cryptoasset Markets, I aim to assist U.S. capital market regulators in determining how best to achieve this goal.

Unlike many foreign countries, the U.S. does not have regulations tailored … Read more

Executive Compensation: The Trend Toward One Size Fits All

In a new paper, I document a recent and strong standardization in the structure of executive compensation. This standardization is unexpected since, in principle, the optimal incentive contract is a function of many factors that vary among firms. Executives receive compensation in many different forms, including salaries, bonuses, long-term incentives, stock, stock options, retirement benefits, and various types of perquisites. Based on contract theory, we expect that each company designs its compensation plans using these elements in different proportions. However, even though we observe much heterogeneity in the design of compensation plans, more than 25 percent of the variation across … Read more

The Lowdown on SEC Approval of the NYSE Primary Direct Listing Proposal

Direct listings, the most promising disruptor of IPOs, received a significant boost this week, thanks to the U.S. Securities and Exchange Commission (SEC) ruling on a petition from the Council of Institutional Investors.

Most common in the tech industry, direct listings have been put to the test four times in the last two years. Spotify and Slack paved the early path with their direct listings in 2018 and 2019, respectively. Earlier this year, Palantir and Asana used direct listings as an alternative to the traditional underwritten IPO and have continued to generate an enormous amount of media attention in their … Read more

Chairman Clayton’s Farewell to the SEC

I recently submitted a letter to President Donald J. Trump informing him that today, December 23, 2020, will be my last day as Chairman of the Securities and Exchange Commission.  The text of the letter is included below.

I again want to thank the 4,500 outstanding women and men of the SEC for their service to investors, our markets and our country.  They have shown time and again how fortunate we are as a nation to have individuals of strong character and unwavering commitment serving at this great agency.  Their importance and the impact of their efforts were on full

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Rethinking Corporate Purpose … But Not as One Might Expect

Corporate purpose is having a moment, as it seems to do each generation or so. The Business Roundtable made waves last year by pivoting away from shareholder centrism in its “redefinition” of corporate purpose. Directors, officers, institutional investors, and others have been buffeted by a new enthusiasm for SRI, Social Impact, and ESG investing. B Lab and a growing cadre of academics, public intellectuals, and legislators have generated interest in bespoke organizations capable of fostering social enterprise. Taken in whole, these developments have fed bold predictions of a generational shift toward prosocial preferences amongst investors and entrepreneurs.

At the center … Read more

Cooley Discusses Delaware Chancery Case on MACs and Business Covenants During COVID

In the months following the onset of the COVID-19 pandemic, a slew of parties filed lawsuits in US courts relating to M&A transactions that were signed prior to March 2020 and that buyers were seeking to terminate as a result of the pandemic. In these lawsuits, buyers commonly alleged one (or both) of the following as justification for their failure to close: (i) that the target suffered an MAE as a result of COVID-19’s impact on its business; or (ii) that target materially breached the conduct of business covenant by virtue of its actions (or inactions) in response to COVID-19. … Read more

Covid and the Corporate Family

My article, Corporate Family Matters, proposes a definition of and governance regime for a particular type of corporate group – the family.  I define the family as an enterprise formed by weaving corporations, partnerships, and LLCs together into a mix of public and private entities acting for the benefit of a parent corporation or for the personal gain of one or more leaders of the enterprise.  A corporation should be treated like a family when: (1) there is more than one entity with shared ownership or management or when an entity is wholly-owned by another entity and (2) that … Read more

Paul Weiss Discusses Defense Spending Bill With Provisions Expanding SEC Disgorgement

On December 11, 2020, Congress passed the National Defense Authorization Act for Fiscal Year 2021, H.R. 6395 (the “NDAA”). The $740.5 billion bill includes language amending the Securities Exchange Act of 1934 (the “Exchange Act”) to provide the SEC with express statutory authority to seek disgorgement in civil enforcement actions pending in federal court. The amendments to the Exchange Act—which also double the statute of limitations for disgorgement from 5 to 10 years—are a direct Congressional response to limitations imposed by the Supreme Court in Liu v. SEC, 140 S. Ct. 1936 (2020) and Kokesh v. SEC, 137 Read more

Contract Design, Default Rules, and Delaware Corporate Law

Incomplete contract theory recognizes that parties have neither the interest, nor the time, nor the ability to anticipate and address every contingency in contracts. The more complex and time-sensitive the transaction, the more practical constraints force lawyers to limit the scope of drafting and broadly rely on legal defaults and open‑ended terms to plug holes and address contingencies.  In theory, this should explain why practitioners broadly choose Delaware as the preferred jurisdiction and forum for merger and acquisition (M&A) transactions and other high‑end corporate deals.  Lawyers appear to perceive Delaware as superior to other states both for its default rules … Read more

Weil Gotshal Discusses Supreme Court’s Upcoming Class Certification Case

On Friday night, December 11, 2020, tucked below its order denying Texas’s bid to overturn the results of the Presidential election, the U.S. Supreme Court agreed to review what petitioners Goldman Sachs Group, Inc. and its former top executives (“Goldman”) billed as “the most important securities case to come before the Court since Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (2014) (Halliburton II).” That the Supreme Court granted Goldman’s petition in Goldman Sachs Group Inc. v. Arkansas Teacher Retirement System without a well-developed circuit split suggests that some members of the Court are … Read more

The Role of Institutional Investors in Stakeholder Capitalism

Institutional investors are increasingly playing a major role in the shift toward stakeholder capitalism.  They are also facing pressure from their clients and others to focus more on ensuring that their investments promote corporate sustainability. Such expectations are reinforced by leading institutional investors’ commitments – such as those included in BlackRock CEO Larry Fink’s 2020 annual letter – to do well by doing good.

In a recent article, I shed fresh light on the role of leading institutional investors in the transition toward stakeholder capitalism. I show that, while institutional investors may encourage the adoption of sustainability-oriented policies by corporations, … Read more

Paul Weiss Discusses SEC Proposal to Permit Offering Gig Workers Equity Compensation

The SEC has proposed amendments that would permit, for a temporary five-year trial period, companies to offer equity compensation to “platform workers” (gig economy workers who provide services by means of an internet or other technology based marketplace platform) under the same regulatory framework available for offerings to employees (available here). The amendments would expand Rule 701 (by which non-reporting companies may issue equity-based compensation without a registration statement) by adding a new subsection, Rule 701(h), and Form S-8 (by which reporting companies issue equity-based compensation) by adding a new General Instruction A.1.(b), to permit these offerings.

The proposed … Read more

Independent Central Banks: The Politics of Reversals

In the United States, President Trump has struggled to decide whether Jay Powell or China’s Chairman Xi is the greater enemy to the U.S. In Turkey, President Erdogan concluded that “interest rates are the mother of all evil,” switched out his central bank governor for refusing to lower interest rates, and reined in the independence of the central bank with the stroke of a pen. In India, Indonesia, Ukraine, and elsewhere, lawmakers are tightening the political grip on monetary authorities. These examples reflect a new reality in monetary policy circles: the political retreat from central bank independence, … Read more

SEC Chair Speaks on Resource Extraction Disclosure Rules

Today [December 16], we take another step in a winding, resource-consuming, decade-long journey to implement Section 1504 of the Dodd-Frank Act.  In 2010, Section 1504 added Section 13(q) to the Securities Exchange Act of 1934, which directed the Commission to issue rules, commonly known as the “resource extraction rules,” requiring resource extraction issuers – in essence, certain companies publicly traded on U.S. exchanges – to disclose information about payments made to a foreign government or the Federal government for the purpose of the commercial development of oil, natural gas, or minerals.

The Commission has finalized these rules twice already.  Yes,

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Sex, Power, and Corporate Governance

On December 1, the Nasdaq Stock Market asked the Securities and Exchange Commission (SEC) for authority to adopt new listing rules aimed at increasing board gender and racial diversity. If approved, Nasdaq-listed companies will be required to disclose their board diversity data and have, or explain why they don’t have, one female and one underrepresented minority board member. Nasdaq’s The request is the latest milestone on the business and investment community’s journey to transforming corporate culture by uprooting long-established power imbalances.

As I map out in my recent article, “Sex, Power, and Corporate Governance,” the #MeToo movement first prompted key … Read more

Wachtell Lipton Discusses Recent Developments with DGCL Section 220 as Pre-Complaint Discovery

Two recent decisions of the Delaware courts confirm that Section 220 of the Delaware General Corporation Law will be consistently interpreted to grant pre-complaint discovery to stockholders seeking to prepare fiduciary-breach litigation.

In Pettry v. Gilead Sciences, Inc., a group of Gilead stockholders sought to inspect corporate documents for the purpose of investigating wrongdoing in the development and marketing of HIV drugs.  C.A. No. 2020-0132-KSJM (Del. Ch. Nov. 24, 2020).  Gilead opposed the demand, principally on the ground that the stockholders’ basis to suspect such wrongdoing—unproven allegations in other lawsuits—was inadequate to justify inspection.  The court disagreed, finding … Read more

Funding Crises: An Empirical Study of the Paycheck Protection Program

Soon after the coronavirus pandemic erupted in the spring, Congress enacted the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, pumping $2.2 trillion into the economy. Now, nine months later, many of that law’s critical elements have ended or will soon expire. Senate Majority Leader McConnell and Speaker of the House Pelosi are engaging in talks but have yet to agree on a new stimulus package.[1] When they do, we believe they can learn several important lessons from the effects of the CARES Act. In our article, we conducted an empirical study of important elements of the CARES … Read more

Do Corporate Sustainability and Sustainable Finance Generate Better Financial Performance?

Sustainability in business and environmental, social, or governance (ESG) factors in finance have entered the mainstream. In 2020, the CEO of Blackrock wrote: “Our investment conviction is that sustainability and climate integrated portfolios can provide better risk-adjusted returns to investors.”

At NYU Stern’s Center for Sustainable Business, we set out to study the state of the research on the topic and surveyed 1,141 primary peer-reviewed papers and 27 meta-reviews (based on ~1,400 underlying studies) published between 2015 and 2020. Recent interest is enormous: The research output over the last five years matches the number of articles published prior to 2015.… Read more

The Rise of International Corporate Law

What do the emergence of independent directors in South Korea, the legal reforms on related-party transactions in India, the continued rise of environmental, social, and governance (ESG) factors in the United States, and the global spread of corporate governance codes have in common? They all trace back to efforts by international organizations – the International Monetary Fund (IMF), the World Bank, the United Nations, and the Organisation for Economic Cooperation and Development (OECD), respectively – to shape corporate governance around the world. The different corporate guidelines and norms produced by international organizations have had a noticeable impact on legal changes … Read more

Skadden Discusses the Intersection of Sustainability Agreements and Antitrust Laws in the EU

Sustainability issues are increasingly high on the list of competition policy priorities both at the European Union and member state levels. The European Commission (EC) and national competition authorities are actively rethinking how competition policy can better support the transition to sustainable economic growth. Whilst recent initiatives are setting the path to much-needed guidance and legal certainty, there are already lessons businesses can take away from the discussions to date.

  • Industry initiatives to tackle sustainability objectives can breach competition rules and should therefore be approached with the same eye to competition law compliance as any other collaboration with competitors. The

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A Tale of Two Enforcement Venues: Why the SEC’s Choice of Where to File Cases Matters

The Dodd-Frank Act of 2010 allows the Securities and Exchange Commission (SEC) to bring enforcement actions and impose civil penalties in administrative proceedings as alternatives to federal district courts. Some argue that this gives the SEC a “home-court” advantage. For example, the SEC serves as both prosecutor and, through the administrative judges it appoints, adjudicator in an administrative proceeding, and no jury trials are allowed.[1] The SEC argues, though, that administrative proceedings can process cases more efficiently than federal courts.[2] Yet the opacity of administrative proceedings and the SEC’s discretion over the choice of venue have prompted criticism and challenges … Read more

Latham & Watkins Discusses IP in the UK After Brexit

On September 28, 2020, the UK government made the Intellectual Property (Amendment etc.) (EU Exit) Regulations 2020 (IP Regulations 2020), which amend the intellectual property (IP) regime in the UK to reflect Brexit-related changes once the transition period ends. The IP Regulations 2020 overlap somewhat complexly with existing UK and EU IP rights. In particular, exhaustion of rights principles seem to have fallen into a lacuna and as a result parallel importation from the UK into the EU may be significantly impacted. Owners of existing registered IP rights and pending IP applications under EU law should carefully consider the … Read more

SEC Chairman Speaks on Revised Rules for Disseminating Market Data

Good morning. This is an open meeting of the U.S. Securities and Exchange Commission on December 9, 2020, under the Government in the Sunshine Act. The Commission today will consider a staff recommendation to adopt amendments to Regulation NMS to modernize the national market system for the collection, consolidation, and dissemination of information with respect to quotations for and transactions in national market system (“NMS”) stocks (“NMS market data”). Broadly speaking, these amendments would, first, expand the content of NMS market data that must be collected, consolidated, and disseminated as part of the national market system under Regulation NMS. Second,

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Insider Trading and Strategic Disclosure

With COVID-19 cases rising rapidly around the world, Pfizer’s announcement on November 9, 2020, that its coronavirus vaccine was highly effective in early trials offered a rare bright spot for the coming winter.[1] But the news was soon dampened by word that the company’s CEO, Albert Bourla, sold some 60 percent of his Pfizer shares on the day of the announcement.[2]  According to Pfizer, Bourla’s sales occurred under a preset arrangement known as a 10b5-1 plan – so named for an obscure SEC rule designed to shield executives from spurious insider-trading accusations. The rule gives an affirmative defense … Read more

Paul Weiss Discusses NY Regulator’s Advice to Financial Companies on Climate Risk

On October 29, 2020, The New York State Department of Financial Services (“DFS”) published an industry letter (the “Industry Letter”) for banks and other financial institutions that it regulates that details the range of climate change risks that could soon impact these institutions.[1] The letter is addressed to both DFS-regulated banking institutions and non-bank institutions, such as money transmitters and virtual currency companies. The letter sets forth DFS’s expectations that banking institutions begin to address the financial risks from climate change in their risk management processes, governance frameworks and business strategies, including by designating a board member or committee … Read more

How Corporate Governance Affects the Success of Initial Public Offerings

In our recent paper, Can Governance Help in Making an IPO “Successful”? New Evidence from Europe, we find that corporate governance affects company performance after an IPO in different ways.  We consider an IPO to be successful if it combines positive performance in the short-term, with a value creation effect, and also in the medium-long-term, with a value protection effect (Bertoni et al., 2014).

As to the short-term, we consider the performance of a company at the date of the IPO, as measured by Q-Tobin, which is calculated as the ratio of the market capitalization of the firm … Read more

Quinn Emanuel Discusses COVID-19 M&A Litigation in Delaware

Many high-profile transactions impacted by the COVID-19 pandemic have fallen apart between signing and closing, resulting in litigation – often in the Delaware Court of Chancery – focused on whether the buyer had an obligation to close.  Buyers backing out of transactions generally have asserted the occurrence of a “material adverse change” or “material adverse event” (“MAE”) and the failure of the to-be-acquired company to operate in the ordinary course of business.  Sellers generally have disputed that COVID-19 caused the failure of closing conditions, and have sued for specific performance of buyers’ obligations to close or damages.  As these cases … Read more

Are M&A Lawyers Really Better Than Other Transactional Lawyers at Contract Drafting?

In a series of papers over the past decade, the three of us have studied extensively the persistence of obsolete terms in sovereign debt contracting. (e.g., here, here and here).  Our interest was motivated by a puzzling observation: Transactional lawyers did not appear to reform their contract clauses promptly in response to changes in the external environment.  In a market with multi-billion dollar transactions, and with some of the most elite law firms in the world, the slow pace of innovation was surprising.  It was especially surprising given the conventional view that good transactional lawyers keep abreast of … Read more

O’Melveny & Myers Discusses the SEC’s Most Recent No-Action Letter on Digital Assets

On Wednesday, November 18, 2020, the staff of the Division of Corporation Finance (the “Division”) of the Securities and Exchange Commission (“SEC” or the “Commission”) took another step forward for crypto regulation by granting a no-action letter to IMVU, Inc. (“IMVU”), a software development company that offers virtual world platforms, to sell its Ethereum-based token, VCOIN. The relief provides that the Division will not recommend enforcement action to the Commission if IMVU offers and sells VCOIN, which is transferable both on and off of IMVU’s platform, without registration under Section 5 of the Securities Act of 1933 (the “Securities Act”) … Read more

On Corporate Purpose, Director Primacy, and the Business Judgment Rule

Historically, how a corporation invests and pursues its goals has been recognized as within the discretion of the board of directors. The business judgment rule insulates directors from liability for exercising that discretion by restricting second-guessing from shareholders absent a showing of fraud, illegality, or self-dealing.  In other words, a business decision that doesn’t turn out well shouldn’t be questioned as long as the directors acted in good faith.

In recent years, though, the business judgment rule seems to have been eroded by forces from both the political right and the political left.  Those leaning right assert that the obligation … Read more

Skadden Discusses California Decision Upholding Uber’s Federal Forum Charter Provision

A California state court dismissed a putative securities fraud class action against Uber, as well as certain individuals and underwriters, on the grounds of inconvenient forum, holding that the federal forum selection provision (FFP) in Uber’s charter was valid and enforceable, and thus plaintiffs were required to bring their claims in federal court.

Plaintiffs, purported shareholders of Uber, brought claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (Securities Act), alleging that the offering documents for Uber’s May 2019 IPO contained false or misleading statements. Uber, along with the individual and underwriter defendants, moved to dismiss

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The Case for Preemptive Oligopoly Regulation

Republican and Democratic leaders have both called for greater scrutiny of the power and influence of Big Tech firms, but, unsurprisingly, they have disagreed about how to address the problem.  Senator Elizabeth Warren and many other leading Democrats have called for breaking up Google, Amazon, and Facebook in a revival of the trust-busting progressive era of the early 20th century.  In contrast, the Trump administration has triggered traditional monopoly review of  a number of leading technology firms, which is likely to lead only to financial sanctions or more modest remedies.

In a recent article, I argue that politicians’ concerns … Read more

Morgan Lewis Discusses SEC Guidance on Disclosure for China-Based Issuers

The SEC Division of Corporation Finance has provided its views regarding certain disclosure considerations for companies based in or with the majority of their operations in the People’s Republic of China.

The US Securities and Exchange Commission (SEC) recognizes the increased exposure of US investors to companies based in or with the majority of their operations in the People’s Republic of China (China-based Issuers) and the SEC’s limited ability to promote and enforce high-quality disclosure standards for China-based Issuers. The Division of Corporation Finance (Corp Fin) published CF Disclosure Guidance: Topic No. 10, Disclosure Considerations for China-Based Issuers (Guidance), on … Read more