The JOBS Act was signed into law on April 5, 2012, with the objective of improving access to the public capital market for growth companies. Title I of the JOBS Act amended the Securities Act and the Exchange Act and has been widely recognized as the most significant relaxation of securities regulation in decades. Title I of the JOBS Act includes provisions designed to “de-risk” and “de-burden” the IPO process for emerging growth companies (EGCs) — issuers with pre-IPO revenues of less than $1 billion. The de-risking provisions are intended to enhance the ability to conduct a successful registered offering … Read more
In a recent blog post, the Acting Director of the Federal Trade Commission Bureau of Competition announced the reversal of the Federal Trade Commission’s (“FTC”) decades-long position regarding the treatment of debt repayment when determining whether a premerger notification filing under the Hart-Scott-Rodino (“HSR”) Act is required. Effective September 27, 2021, companies and individuals that do not file HSR based on excluding retired debt from the transaction value may face enforcement action. Perhaps even more concerning, the FTC also cast doubt in general on whether HSR practitioners may rely on past informal guidance from the FTC’s Premerger Notification Office … Read more
Evaluating the performance of CEOs is one of the most important tasks of corporate boards of directors. When deciding whether to retain or dismiss CEOs, boards should follow the informativeness principle developed by Holmström (1979) and include all valuable performance signals regarding the quality of the CEOs. Of course, boards should also ignore all uninformative performance signals. For example, CEOs should not be rewarded or punished for, in effect, getting lucky or unlucky.
In a recent working paper, I investigate whether boards violate the informativeness principle in firing CEOs by failing to ignore outcomes that are conditionally uninformative. If … Read more
Good morning, Chairman Brown, Ranking Member Toomey, and members of the Committee. I’m honored to appear before you today for the first time as Chair of the Securities and Exchange Commission. I’d like to thank you for your support in my confirmation this spring. As is customary, I will note that my views are my own, and I am not speaking on behalf of my fellow Commissioners or the staff.
We are blessed with the largest, most sophisticated, and most innovative capital markets in the world. The U.S. capital markets represent 38 percent of the globe’s capital markets. This
… Read more
Crypto funds are a new financial intermediary that trade in cryptographically protected digital assets, known as coins or tokens. Both the number of crypto funds and investments in crypto funds are soaring. As of the second quarter of 2021, more than 800 crypto funds are active, and their aggregate assets under management exceed $60 billion. The trend is likely to continue, as crypto funds returned an average of 98 percent (before fees) to their investors in the first quarter of 2021.
Crypto funds differ from more traditionally-managed funds in significant ways. For example, CryptoFundResearch reports that 43 percent of all … Read more
On June 3, 2021 President Joseph Biden issued a “Memorandum on Establishing the Fight Against Corruption as a Core United States National Security Interest,” (hereinafter “Anti-Corruption Memorandum” or “Memorandum”). In issuing the Memorandum, President Biden placed fighting corruption at the “core” of his foreign policy, and explained that he wanted his administration to “lead efforts to promote good governance; bring transparency to the United States and global financial systems; prevent and combat corruption at home and abroad; and make it increasingly difficult for corrupt actors to shield their activities.” The Memorandum set a deadline for obtaining recommendations from … Read more
As COVID-19 rocked financial markets in March 2020, the Treasury market failed to perform its role of maintaining financial stability. Unable to respond to the surge of investors liquidating their Treasury holdings to raise cash, the secondary market ground to a virtual halt. Liquidity disappeared. Trading costs skyrocketed. And the price of Treasuries – a common benchmark for financial assets – crashed with other assets, instead of remaining stable or rising.
In a new article, we argue that this breakdown in the Treasury market undermined the credibility of Treasuries as the safe asset in financial regulation, and the collateral … Read more
In an important decision this week, the Delaware Court of Chancery permitted a Caremark duty-of-oversight claim to proceed against the directors of the Boeing Company. Stockholder plaintiffs sued Boeing’s board, seeking to recover costs and economic losses associated with the crash of two 737 MAX jetliners. The plaintiffs’ complaint alleged that the directors failed to monitor aircraft safety before the crashes and then failed to respond to known safety risks after the first crash. The lawsuit seeks to hold the directors liable for the resulting loss of “billions of dollars in value.”
The court denied the directors’ motion to dismiss. … Read more
Each year, U.S. public companies spend millions of people-hours producing the securities disclosures that undergird public capital markets. But relatively little is known about how firms produce such consequential information, including whether they are spending too much, too little, or just enough on disclosure procedures. Failures of these procedures – from the inclusion of outright falsehoods to inartful drafting – can render a firm’s disclosures misleading, potentially causing investor losses. Of course, those failures can also lead to substantial costs for firms themselves in the form of securities litigation or government investigations. All equal, higher-quality procedures would be expected to … Read more
The torrid pace of new securities class action filings over the last several years slowed a bit in the first half of 2021, a period in which there have been many notable developments in securities law. This mid-year update briefs you on major developments in federal and state securities law through June 2021:
- In Goldman Sachs, the Supreme Court found that lower courts should hear evidence regarding the impact of alleged misstatements on the price of securities to rebut any presumption of classwide reliance at the class-certification stage, and that defendants bear the burden of persuasion on this issue.
… Read more
In a new paper, I compare private and public class action settlements. I find a dearth of theoretical law and economics literature on public class actions, so I use the private class actions literature and a pivotal case study to highlight key issues and suggest areas for future research.
Class Actions Are Different. Class actions are quite different from other lawsuits. Frequently an attorney initiates the action rather than a plaintiff, and there is no formal relationship with members of the class. There are clear economies of scale in class actions, and the plaintiffs’ attorneys perform a socially useful … Read more
In recent years, the number of enforcement actions by the Securities and Exchange Commission (SEC) has declined significantly, which has led to questions about the SEC’s effectiveness. While several potential explanations exist for this decline, SEC officials have often pointed to being too busy to effectively investigate and prosecute all potential misconduct (Peikin 2019).
In a new study, we examine the impact of busyness on the SEC Division of Enforcement’s formal investigation process. In particular, we focus on four broad lines of inquiry: (1) the effect of open-case backlog on the overall likelihood of SEC investigations; (2) the effect of … Read more
The ever-evolving challenges facing corporate boards prompt periodic updates to a snapshot of what is expected from the board of directors of a public company—not just the legal rules, or the principles published by institutional investors and various corporate and investor associations, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior. The ongoing coronavirus pandemic and resulting economic and social turbulence, combined with the wide embrace of ESG, stakeholder governance and sustainable long-term investment strategies, are propelling a decisive inflection point in the responsibilities of boards of directors. The 2016 and … Read more
No rule of corporate law may be more foundational than the internal affairs doctrine. The doctrine provides that the internal affairs of a corporation – the “matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders” – are governed by the laws of the state in which the corporation is chartered.
Lurking within this widely accepted principle, however, is an even more foundational question: Is the internal affairs doctrine simply a choice of law rule enabling a corporation and its shareholders to choose which state’s law will govern their private business arrangement? … Read more
On July 29, 2021, the Superintendent of the New York State Department of Financial Services (DFS) issued an Industry Letter (Industry Letter) announcing its new initiative to support diversity, equity and inclusion (DEI) efforts by collecting and publishing data on the diversity of corporate boards and management of its Regulated Banking Institutions and Regulated Non-Depository Financial Institutions (collectively, Regulated Institutions). The announcement of this initiative follows the establishment of a new Statewide Office of Financial Inclusion and Empowerment led by Tremaine Wright, and the initiative is similar to others that have been undertaken by federal and European bank regulators. While … Read more
On July 10, 2020, the Securities and Exchange Commission (SEC) announced a proposal to increase the reporting threshold for Form 13F from $100 million to $3.5 billion. Form 13F was adopted in 1975 and required managers with more than $100 million under investment to report their equity holdings on a quarterly basis. In the subsequent 45 years, the number of 13F filers increased 17-fold to reach 5,089. Not surprisingly, given the drastic increase in reporting volume, there were no systematic checks for accuracy, and there were no fines for erroneous data. Still, the plan to raise the reporting threshold faced … Read more
On August 30, 2021, the SEC filed settled enforcement actions against three groups of broker-dealers and investment advisers for failing to protect confidential customer information in violation of Rule 30(a) of Regulation S-P (the “Safeguards Rule” or “Rule”). One group of the entities was also found to have violated Section 206(4) of the Advisers Act and Rule 206(4)-7, by allegedly providing misleading information in its breach notification to customers. These actions, which were announced just two weeks after the SEC imposed a $1 million civil penalty for an issuer’s allegedly misleading data breach disclosures in connection with a public company’s … Read more
In the United States, major financial scandals in the 1970s, 1980s, and 1990s resulted in federal pressure on corporations to inculcate ethical behavior in their employees. The Foreign Corrupt Practices Act, Federal Sentencing Guidelines, Sarbanes-Oxley Act, the U.S. Organization Sentencing Guidelines, and similar laws either mandated or encouraged the expansion of corporate compliance programs and, ultimately, led to creation of a “compliance industry.” In this new industry – just as in any emerging industry – arose specialized programs (and needs), trade associations and conferences, and a large job market to meet increased demands. One recent analysis estimated that the … Read more
What are the consequences of increasing public information in a market of risk-seeking participants? Academics and policy makers alike are grappling with this question following the influx of speculative capital flows from individual investors in financial markets. As platforms such as Robinhood take root, the influence of gambling behavior is likely to increase and further affect the functioning of markets. The topic is also a key policy issue in light of the Securities and Exchange Commission (SEC) plan to review new policies aimed at increasing transparency to address market developments such as the frenzy of trading in “meme” stocks like … Read more
Editor’s Note: A counter-response immediately follows this post.
In a recent post, Professor Jeffrey N. Gordon argued that the Delaware Supreme Court should upend over three decades of precedents and apply Blasius, rather than Unocal, to invalidate a corporate board’s adoption and implementation of a poison pill. I disagree. Doing so is neither necessary, nor justified, to uphold the Chancery Court’s determination that a particularly aggressive poison pill, adopted by The Williams Companies in March 2020, was not a reasonable response to potential activist threats under Unocal. Gordon’s post also misinterprets some of the history … Read more
I appreciate the engagement by long-term pill observer Eric Robinson with my Corporate Vote Suppression piece. I am also glad that he agrees that the pill in The Williams Companies Shareholder Litigation ought to be struck down, though he narrowly confines his ground for supporting the Delaware Chancery Court’s decision to do so. His invitation to re-examine Moran v. Household International shows how far the anti-activist pill has strayed from its initial justification (and limitation). Moran sustained a “flip-over pill” against the threat of a front-loaded two-tier hostile bid and countenanced a 20 percent pill trigger because it represented the … Read more
Editor’s Note: A response to the statement below immediately follows this post.
Recently a purported shareholder of certain special purpose acquisition companies (SPACs) initiated derivative lawsuits asserting that the SPACs are investment companies under the Investment Company Act of 1940, because proceeds from their initial public offerings are invested in short-term treasuries and qualifying money market funds.
Under the provision of the 1940 Act relied upon in the lawsuits, an investment company is a company that is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities.… Read more
A joint letter by 58 law firms is certainly a notable declaration, particularly when pulled together within a mere 10 days after litigation initiated by esteemed scholars. Observers might be tempted to wonder whether the motivation for such a quick and public press release is the signatories’ concern with analyzing a legal issue carefully, or with losing a large book of business and being called to account for legal advice that now stands in question. The New York Times quotes one attorney as saying, “We really needed something powerful to take away” the “P.R. narrative.”
Upon what, precisely, have all … Read more
Most efforts to manage systemic risk tend to focus on risks arising from within financial markets, from existing regulators, or from legislative misadventures. Yet self-regulatory organizations (SROs) and the markets that depend on their steady functioning now face an underappreciated risk: that the post-Trump era U.S. Supreme Court will render a market-destabilizing decision in the foreseeable future. Little thought has been devoted to a response should the Supreme Court obliterate a financial market utility or void some critical SRO rule, causing capital markets to freeze up from legal uncertainty.
For many years, these types of scenarios would have been entirely … Read more
Mass claimant litigation is on the rise in the English courts, with multinational companies in particular facing ever-growing exposure. While large class action suits are relatively common in jurisdictions such as the United States and Australia, until recently these actions have not been a prominent feature of the United Kingdom’s legal landscape.
A series of recent decisions have significantly broadened the scope and enhanced the viability of mass claimant actions in England and Wales. On 18 August 2021, the Competition Appeal Tribunal (the “CAT”) handed down its decision in Walter Hugh Merricks CBE v Mastercard Incorporated and Others  CAT … Read more
Digital assets, cryptoassets, cryptocurrencies, and security-tokens have become ubiquitous. Yet approaches to regulating them differ around the globe. In the U.S., the Securities and Exchange Commission (“SEC” or “Commission”) has become a uniquely active crypto-regulator. In my recent article, I examine the Commission’s approach to digital-asset markets.
The Commission has not provided a clear rule for determining whether a digital asset is a security subject to the federal securities laws or something else, like a commodity not subject to the securities statutes. Instead, the SEC has opted for the more flexible approach of enforcement actions that rely on the … Read more
Sitting as courts of equity, bankruptcy judges have embraced an exceptionalist role whereby they exercise widespread discretion in deciding cases. The doctrine of equitable subordination epitomizes bankruptcy exceptionalism and its potential for market distortion.
The doctrine originated as a remedial measure to give innocent creditors of insolvent debtors priority over creditors that engage in malicious misconduct. The Supreme Court introduced equitable subordination in a bankruptcy case in which a parent company virtually preyed upon its subsidiary, effectively driving it into insolvency. The Court ruled that the subsidiary’s preferred shareholders should have priority over the parent’s intercompany debt claims against the … Read more
On July 27, 2021, the Financial Conduct Authority (“FCA”) published a policy statement that includes final rules amending the UK Listing Rules, and new associated guidance, applicable to special purpose acquisition companies (“SPACs”). The new rules and guidance came into force on August 10, 2021.
The final requirements are based on the FCA’s earlier consultation launched on April 30, 2021 (the “Consultation”). The Consultation’s proposals focused on the presumption of suspension of trading for a UK-listed SPAC that (under the prior FCA rules) would be triggered when the SPAC announced an intended … Read more
Mutual funds and exchange-traded funds are the cornerstone of many Americans’ investment and retirement plans. (For simplicity, we refer to all these investments as “mutual funds.”) Collectively, investment companies such as BlackRock, Fidelity, State Street, and Vanguard hold more than $29 trillion on behalf of more than 47 percent of all households in the United States and account for approximately 30 percent of all U.S. corporate equity. (2020 Investment Company Factbook, 2020 Facts at a Glance)
Yet, according to some antitrust scholars, the large size that makes these mutual funds efficient investment vehicles also makes them unlawful. Some … Read more
Two years ago, the Business Roundtable (BRT) issued a “Statement on the Purpose of a Corporation,” signed by the CEOs of 184 major U.S. corporations, that rejected shareholder primacy, declared “a fundamental commitment to all [corporate] stakeholders” and linked corporate purpose to advancing and protecting the interests not just of shareholders, but of all corporate stakeholders. The BRT’s statement reflected rapidly growing momentum towards a more inclusive corporate governance regime and promised to accelerate stakeholder governance by committing business leaders to the interests of employees, customers, suppliers, communities and the environment.
The BRT statement elevated the topic of stakeholder capitalism … Read more
Since the foundational decision in In re Caremark Intern. Inc. Derivative Litig., Delaware corporate law has required boards of directors to establish reasonable legal compliance programs. Although Caremark has been applied almost exclusively with respect to law and accounting compliance, the original Caremark decision contemplated applying the oversight duty to the corporation’s “business performance.” Accordingly, Caremark claims plausibly could lie in cases in which the corporation suffered losses, not due to a failure to comply with applicable laws, but rather due to lax risk management.
In fact, several commentators have argued that Caremark liability extends—or, at least, … Read more
On August 16, 2021, the SEC charged Pearson plc with misleading investors and failing to maintain adequate disclosure controls and procedures in connection with a cybersecurity incident. According to the SEC’s order, Pearson learned in March 2019 about an intrusion involving the exfiltration of millions of rows of student data, including names and some birthdates and email addresses, as well as usernames and hashed passwords for school personnel. In July 2019, a periodic filing characterized data privacy incidents as an ongoing risk factor but failed to disclose that such an incident—and one characterized by the Order as “material”—had actually occurred. … Read more
Two decades ago, Congress repealed the Glass-Steagall Act’s Depression-era separation between commercial banking and other financial activities, paving the way for bank holding companies (BHCs) to expand into investment banking and insurance. At the time, some critics – most notably, Professor Arthur Wilmarth – warned that financial conglomeration would encourage BHCs to exploit their depository institutions’ “federal safety net.”
Critics were correct to suspect that financial conglomerates might take advantage of their bank subsidiaries by transferring government subsidies to their nonbank affiliates. Banks enjoy many forms of government support. For example, the Federal Deposit Insurance Corporation guarantees bank deposits, providing … Read more
Earlier last week, the SEC filed a complaint in the Northern District of California alleging insider-trading charges that may signal a more aggressive approach to enforcement under the agency’s new leadership. In SEC v. Panuwat, the SEC charged a corporate executive who learned about an impending acquisition of his employer and then traded in the securities of an unrelated company in the same industry that he anticipated would materially increase in price when his employer’s acquisition was publicly announced.
The SEC’s complaint alleges that Mathew Panuwat was a business development executive at Medivation, Inc., a mid-cap oncology-focused biopharmaceutical company. … Read more
Corporate codetermination, which allows workers to elect representatives to a board of directors, is in the news again. Proposals for codetermination were, for example, a prominent part of this past presidential campaign, with senators Sanders and Warren disagreeing over what portion of a board workers could choose. Multiple bills in the Senate would implement codetermination and have sparked accusations that, if enacted, they would harm American economic growth.
To test these and other claims, economists and others have looked to real-world examples of codetermination, mainly in Europe, but their empirical studies have provided little information that’s relevant to the United … Read more
In yet another important signal of the SEC’s increasing focus on how public companies respond to, and issue disclosures concerning, significant cyber breaches, the Commission announced yesterday that it had entered into a settled administrative order with Pearson plc, finding violations of the negligence-based antifraud provisions of the Securities Act and imposing a $1 million civil penalty. Pearson neither admitted nor denied the Commission’s findings.
The Order recites that a substantial volume of personal data concerning students and school administrators was stolen by a “sophisticated threat actor” from Pearson’s academic performance assessment services that were provided to 13,000 school districts … Read more
The Delaware Supreme Court has before it a case that could dramatically reshape corporate governance in the United States. The case, The Williams Companies Stockholder Litigation, addresses the legitimacy of an “anti-activist pill” whose particularly aggressive features would severely limit both an activist’s economic incentives and its capacity to organize other shareholders. The implications reach well beyond the hedge-fund wolf packs purportedly roaming the corporate landscape. The validation of such an anti-activist pill would throttle the incipient ESG activist movement that recently illustrated its potential in successful challenges at Exxon-Mobil. It would also require the Delaware courts to come … Read more
The CFTC and FinCEN recently announced a settlement with BitMEX for $100 million to resolve an enforcement action related to the exchange’s failure to register as a futures commission merchant and failure to establish a BSA/AML compliance program.
On August 10, 2021, the Financial Crimes Enforcement Network (FinCEN) and the Commodity Futures Trading Commission (CFTC) announced that the agencies had assessed a $100 million civil monetary penalty (CMP) against BitMEX, one of the world’s largest cryptocurrency derivatives exchanges. BitMEX is a peer-to-peer cryptocurrency trading platform that offers its users the ability to trade cryptocurrency derivatives, including swaps, … Read more
Boards of directors at U.S. firms are increasingly using finance committees featuring financial experts to oversee complex finance-related matters. Since 2003, most U.S. public firms have been required by NYSE and NASDAQ to have audit, compensation, and governance committees. Finance committees are the most common voluntary board committees in the U.S., and many influential firms (e.g., GE, Verizon, GM, Coca Cola, etc.) use or once used finance committees to handle complex financial issues. GE established a Finance & Capital Allocation Committee in December 2017, but Robert C. Pozen argues that GE should have adopted a finance committee much earlier and … Read more
At the Aspen Security Forum on August 2, 2021, SEC Chair Gary Gensler reaffirmed the SEC’s heightened focus on cryptocurrency. Following these comments, the SEC announced two enforcement resolutions that provide further guidance on the SEC’s approach to crypto enforcement. First, on August 6, the SEC announced a $13 million resolution against a lender and its two founders for offering unregistered securities using decentralized finance (DeFi) technology. And second, on August 9, the SEC announced a $10 million settlement with an online digital asset exchange for offering unregistered securities.
The key takeaways are as follows:
… Read more
The extraordinary rise of China’s economy has made understanding Chinese corporate governance an issue of global importance. A rich literature has developed analyzing the Chinese Communist Party’s (CCP’s) role as China’s largest controlling shareholder and the impact that this has on Chinese corporate governance. However, the CCP’s role as the architect – and direct and indirect controller – of institutional investors in China has been largely overlooked in the legal literature.
This lack of focus on institutional investors in Chinese corporate governance may have made sense two decades ago. At that time, in listed Chinese companies, institutional investors’ shareholdings were … Read more
The emphasis on the contribution of local knowledge to economic growth is a key tenet of classical economic theory. The Hayekian worldview, for example, sees the dispersion of local pockets of knowledge across the economy as the primary reason why centralized planning fails to produce optimal results. In the realm of corporate finance, these considerations emphasize the importance of firms’ reliance on local CEOs with access to social networks where information flows in a subtle and nuanced way that highly depends on specific individuals rather than formal institutions. Focusing on the local, however, comes at a cost, as a rich … Read more
With the increasing internationalization of law and legal scholarship, comparative corporate governance has seen a burgeoning volume of research from a practical, theoretical, and empirical perspective. Practically speaking, both internationally and within individual countries, most corporate governance research deals with the interaction between board members, officers, and shareholders, primarily in large, publicly traded corporations. Much of the literature is preoccupied with reducing conflicts of interest between shareholders and management and consequently minimizing agency cost, vindicating the narrow finance perspective. Given the predominance of controlling shareholders around the globe, the literature increasingly focuses on conflicts between controlling and minority shareholders. In … Read more
As has become widely known in the past few years, the mutual-fund industry is more concentrated than ever, especially because of the growing use of index funds. Whether this is a problem and how to respond have been the topics of considerable debate. Commentators have laid out several possible reforms, including antitrust responses, regulations that limit the number of companies in an industry that an index fund may invest in, and the wholesale removal of some mutual funds’ power to vote. But many of these responses would disadvantage index funds, which would be unfortunate because index funds have greatly benefited … Read more
In a recent working paper, I explore the intersection of contemporary corporate governance and transnational law. Transnational law is, of course, far from a settled concept. For early theorists, it involved conduct or events that crossed national boundaries. More recent scholarship, however, has focused not on what is being regulated, but rather on how laws and norms are transmitted between supranational and local levels.
Corporate governance fits naturally within this modern conception of transnational law. Today’s corporate governance is highly fragmented and includes a complex array of public and private actors. It also embodies legal and non-legal elements, which operate … Read more
Congressional critics of the agencies reviewing bank mergers have in recent months claimed that those agencies “rubber stamp” mergers and that merger review standards relating to antitrust are too lax. We believe those critics are misinformed.
Bank mergers are among the most regulated in the economy. The Federal Reserve Board (the “Fed”) has extraordinary, virtually carte-blanche power in approving or denying bank holding company mergers (as do the OCC and FDIC with respect to bank mergers), reviewable only by a federal appeals court and under a highly deferential standard of review. Their determinations, especially with respect to … Read more
On July 29, 2021, the House Financial Services Committee voted to advance H.R. 4618, The Short Sale Transparency and Market Fairness Act, a well-intentioned bill with a misguided provision that was likely the product of hurried drafting. The legislation would require investors managing over $100 million in assets to provide ongoing portfolio disclosure on Form 13-F on a monthly rather than quarterly interval and extend disclosure to short positions and derivatives.
There is much to praise in H.R. 4618. Current periodic disclosure rules require the reporting of long positions alone, which is partial at best and outright misleading at … Read more
On March 5, 2021, LIBOR’s administrator, ICE Benchmarks Administration (the “IBA”), and LIBOR’s regulator, the U.K. Financial Conduct Authority (the “FCA”), announced that LIBOR will no longer be provided (i) for all sterling, euro, Swiss franc and Japanese yen settings, and the one-week and two-month U.S. dollar settings after December 31, 2021 and (ii) for the remaining U.S. dollar settings after June 30, 2023. On March 8, 2021, the Alternative Reference Rates Committee (“ARRC”) confirmed that the IBA and FCA announcements constitute a “Benchmark Transition Event” with respect to all U.S. dollar settings under the ARRC recommended fallback language for … Read more
Like advanced economies, emerging economies were buffeted by the global economic slowdown stemming from the COVID-19 pandemic and the associated lockdowns of national economies. In 2020, emerging economies (and developing countries) contracted by 2.1 percent (their steepest decline in many years), but the decline was not as severe as in advanced economies (-4.6 percent), according to the latest data from the International Monetary Fund (IMF), released in July 2021 as part of its World Economic Outlook Update.
Emerging economies and developing countries taken as a whole are expected to experience a major rebound this year, with anticipated growth reaching … Read more
Two recent decisions on the scope of legal privilege in the United States and Europe have once again demonstrated the importance of understanding fully the scope of legal privilege in the jurisdictions relevant to companies’ operations.
In the United States, a ruling from a Federal Court in San Francisco denied legal privilege to Elizabeth Holmes – founder of the beleaguered and now-dissolved medical device start-up Theranos Inc. (“Theranos”) – over 13 communications between Ms Holmes and the law firm Boies Schiller Flexner (“BSF”) on the basis that the privilege belonged to the company, Theranos, and not to Ms Holmes personally.… Read more
The three primary determinants of economic growth – physical capital growth, human capital growth, and technological innovation – rely on citizens’ confidence that private property rights are secure. Essential to that confidence is the rule of law.
Rule of law is an important catalyst for financial development. It allows for an effective judiciary, which is critical for the enforcement of legal contracts. Shareholders rely on the contractually created limited liability feature of equity to undertake risky, but value-enhancing, investments. That feature is essentially a contract between shareholders and debtholders (and other stakeholders) providing that, when a company’s fortunes sour, shareholders … Read more
The Securities and Exchange Commission under Chair Gary Gensler has been exploring transparency issues and other problems in the private equity industry and considering whether additional policy interventions are needed. One motivating factor is that public pension plans are the largest investors in this $5 trillion industry.
Context is important here. This is not the first time that more aggressive policy interventions have been considered to address perceived problems in private equity. As discussed in my 2020 paper, Public Investors, Private Funds, and State Law, a wave of state legislatures passed, or seriously considered passing, laws to mandate better … Read more
The European Commission (the “Commission”) recently issued long-awaited answers to questions raised by the European Supervisory Authorities earlier this year on the Regulation on Sustainability-related Disclosures in the Financial Sector (“SFDR”). This Update covers answers to questions that relate to some key areas of legal uncertainty under SFDR. While the explanations are welcome, a number of answers do not provide the clarity expected.
SFDR applies to non-EU AIFMs. In line with market understanding, the Commission confirmed that, under its interpretation of SFDR, “financial market participants” that are in the scope of SFDR include non-EU alternative investment fund managers (“AIFMs”) … Read more
Companies that engage in M&A regularly employ a variety of financial, legal, and other advisers to enhance the chances of success for a deal. Though research has extensively examined the impact of financial advisers, and particularly investment bankers, on a deal’s outcome, the influence of strategy advisers such as management consulting firms (and legal advisers) has rarely been studied. Overall, based on a global questionnaire of over 100 M&A professionals, we find that strategy consultants contribute significantly to the perceived M&A success of firms.
Between December 19, 2019 and February 28, 2020, companies worldwide were surveyed regarding their M&A … Read more
On July 27, 2021 the FCA published a policy statement setting out its planned amendments to the Listing Rules to remove the presumption of suspension that applies to special purpose acquisition companies (SPACs) when a potential acquisition target is identified (the ‘de-SPAC’ transaction), subject to certain investor protection features. These changes are geared towards making the London Stock Exchange a more attractive listing venue for SPACs and follow the publication of the UK Government’s review of the UK listing regime, as discussed in our client memo of March 3, 2021, and the subsequent consultation by the Financial Conduct Authority (FCA) … Read more
Discussions on the role of higher-order beliefs (investor beliefs about the beliefs of other investors) in financial markets can be traced back to Keynes’ (1936) comparison of the stock market to a beauty contest. Investors “are concerned,” he famously said, “not with what an investment is really worth to a man who buys it for keeps, but with what the market will value it at [. . .] three months or a year hence.” Interest in higher-order beliefs models continues today. An anecdotal example of the role of higher-order beliefs is the downgrade of Citigroup by analyst Meredith Whitney in … Read more
Some might wonder: What does the SEC have to do with crypto?
Further, why did an organization like the Aspen Security Forum ask me to speak about crypto’s intersection with national security?
As is customary, I’d like to note that my views are my own, and I’m not speaking on behalf of the Commission or the SEC staff.
Let me start at the beginning.
It was Halloween night 2008, in the middle of the financial crisis, when Satoshi Nakamoto published an eight-page paper on a cypherpunk mailing list that’d been run by cryptographers since 1992.
Nakamoto — we … Read more
Since its creation in 2008, the blockchain has seemed incompatible with legal constraint. Satoshi Nakamoto, the pseudonymous inventor of Bitcoin, hailed the blockchain’s “unstructured simplicity.” Even now, apostles of distributed ledger technology (DLT) strongly resist the idea that it needs regulation, arguing that it was designed precisely to avoid centralized control.
This did not, however, stop courts and legislators around the world from becoming increasingly concerned about DLT. They are no longer focusing only on the dangers cryptocurrencies might pose to the public, such as its potential use in money-laundering, the financing of terrorism, or tax … Read more
As noted in our previous memos, the SEC is considering and has sought input from investors on potential new disclosure requirements related to climate change and other sustainability issues. Yesterday, SEC Chairman Gary Gensler made remarks that add some clarity as to what can be expected: a combination of qualitative and quantitative climate-risk disclosures that are consistent, comparable and decision-useful to investors. Examples of potential qualitative disclosures include how the company’s leadership manages climate-related risks and opportunities, how such matters impact corporate strategy and, potentially, the use of scenario analyses. Quantitative disclosures may include disclosure of Scope 1, 2 … Read more
Voluntary industry-wide agreements have recently emerged as a way to promote corporate social responsibility (CSR). Competitors in industries as diverse as chocolate production, fashion design, and truck manufacturing aspire together to pay fair wages or transition to less polluting products. A growing management literature endorses the idea. Henderson (2020), for instance, calls for “industry-wide cooperation” to stop environmental degradation and economic inequality.
Joint decision-making allegedly would help reduce first-mover disadvantages that can dissuade companies from acting responsibly if it puts them at a competitive disadvantage. Firms coordinating their business decisions, however, raises antitrust concerns. To believers in the effectiveness … Read more
As the momentum of shareholder engagement on climate-related matters continues to grow across the globe, including in Canada, these issues remain a key focus area for public companies. One of the tools that has gained prominence is the so-called “Say on Climate” vote, where shareholders vote on their company’s climate policies.
The initiative, launched by Christopher Hohn, a British fund manager, in conjunction with his investment firm The Children’s Investment Fund Management (“TCI”), was first implemented by Aena, a Spanish airports group, in 2020. Since then, several other blue-chip firms like Unilever, Glencore, and CN… Read more
In my recent article, A Social Enterprise Company in EU Organizational Law?, I discuss the present and future regulation of social enterprises in Europe. For the moment, social enterprises – like other “social economy” organizations – have been harnessed to act as surrogates for governments in coordinating the administration, financing, and implementation of domestic social and welfare policy. To a greater or lesser extent, therefore, social enterprises are regulated domestically by individual member states of the EU (“Member States”), “with little private leeway for initiative-taking outside government policy”. This means that social enterprises do not enjoy the … Read more
Over the past two decades, delisting from an exchange has become a popular choice for many public companies. Several studies attribute this trend to a number of factors, including the increased concentration of U.S. markets, which made many small and medium size public firms less viable; tightening of regulatory requirements (SOX, for example); and emergence of capital-raising alternatives for small and medium size private firms (for example, private equity funds). In sum, the net benefit of staying an exchange-listed firm has diminished, and various going private legal procedures have become popular.
The most common delisting method in the U.S. is … Read more
It’s good to be here with the Principles for Responsible Investment. As is customary, I’d like to note my views are my own, and I’m not speaking on behalf of the Commission or the SEC’s staff.
Before we get to the main event — on climate and finance — I’d like to discuss something a lot of us are watching these days: the Olympics.
In the Olympics, there are rules by which we measure an athlete’s performance.
In gymnastics, for example, the scoring system is both quantitative and qualitative. Athletes are evaluated based on the numeric difficulty of the skills … Read more
How do companies based in countries with weak government institutions earn the trust of minority investors and raise capital? Where the rule of law and government enforcement cannot control corruption, insiders seem free to expropriate their company’s resources, making it essential for them to somehow assure potential outside investors that they can be trusted. Establishing trust is especially important for growing firms that have profitable investment opportunities and are most in need of external capital.
One promising approach to building trust might be to pay a dividend – there is credibility in cash. However, paying a fixed dividend consistently, as … Read more
On July 9, President Biden issued an Executive Order that announced a policy of increased antitrust enforcement across many industries. The DOJ Antitrust Division and the Federal Trade Commission quickly followed with an announcement that they would jointly launch a review of merger guidelines with an eye towards a more aggressive enforcement approach.
These announcements serve as an important reminder that the risks resulting from more vigorous merger review are not limited to getting the deal through. Companies and their investors should also consider the risks posed by criminal antitrust investigations that can follow merger review. One need look no … Read more
This post responds to the paper, Exit vs. Voice, by Eleonora Broccardo, Oliver Hart, and Luigi Zingales (BHZ), a deep engagement with the choice between alternative means by which an “altruistic” investor can influence corporate behavior. An “altruistic” investor is one who derives some utility from conferring a social benefit with the goal of inducing firms to change their behavior in a socially responsible way. The two possible mechanisms are “exit” (divestment) and “voice” (shareholder voting).
BHZ follow prior work by Hart and Zingales that argues that investors can reasonably believe that firms can provide public goods at a … Read more
Since its inception, ISS Securities Class Action Services LLC (“ISS SCAS”) has tracked more than 13,000 shareholder class actions across the world, including 12,000+ cases within the United States. In this report, ISS SCAS closely examines the largest securities class action settlements by U.S. state, as well as the District of Columbia.
In the first edition of this report, published in 2018, ISS SCAS identified 48 cases as the largest securities class action settlements, by total settlement amount and by state. In this updated version, ISS SCAS provides a refresh of the data, including recently settled cases that now meet … Read more
When the COVID-19 pandemic shuttered major economies in March 2020, it also wreaked havoc on financial markets. In the first few weeks of March, investment-grade corporate bonds lost roughly a fifth of their value, on par with the declines in equity and high-yield debt. (Haddad et al., 2020; Falato, Goldstein & Hortaçsu (forthcoming)). Contrary to the usual flight to quality, in mid-March, U.S. Treasury yields began rising and only stabilized after the Federal Reserve initiated a massive purchase program. (Vissing-Jorgensen, 2020). The distress in the Treasury market accentuated distress in other markets and liquidity challenges for firms. Nonbanks that service … Read more
Colorado has just adopted a brand-new data privacy law and Nevada has just significantly amended its law. These changes add rights for consumers, and compliance obligations for businesses, that take the U.S. further in the direction of European-style privacy law. Colorado and Nevada join California and Virginia in adding to the growing patchwork of disparate state laws — making it that much harder for any business seeking to have a single privacy program that is compliant everywhere.
Privacy bills also recently were considered in New York, Florida, and Washington, but did not pass; these bills or others like them are … Read more
Cryptocurrencies are by now widely known as electronically generated and stored currencies that enable users to trade tokens. The tokens are exchanged anonymously through a decentralized payment system: the blockchain. To further anonymity, the parties to cryptocurrency transactions are identified by a unique string of random numbers rather than by a name or other personal information.
There is however a dark side to this anonymity. It makes it easier for criminals and terrorists to launder money and otherwise transact illegal business. For example, anonymous tokens provide terrorists with access to cash that is essential to organizing attacks without dependency on … Read more
As the U.S. and countries around the globe attempt to control the Coronavirus pandemic, investors continue to experience meaningful recoveries from securities-related class action settlements.
In the first half of 2021 (January 1 – June 30), U.S. class action settlements totaled $2.32 billion, an increase of 11.5% over the same period in 2020. More impressively, a total of 59 cases settled during the first six months of 2021, an increase of 34.1% over the same period in 2020. The average value of settlements, however, dropped by 16.9% ($39.3 million in 2021 vs $47.3 million in 2020).
The total settlement dollars … Read more
Our examination of the votes cast by 155 mutual funds on over 6 million corporate election items during 2004-2017 led us to a surprising conclusion: We found that Institutional Shareholder Services’ (ISS) proxy advice did not lead funds to vote as if they were informed – more often than not it pushed them in the opposite direction.
The purpose of proxy advice is to allow funds to cast their votes as if they were informed, without having to actually become informed. Given the centrality of proxy advice in today’s corporate elections, the viability of shareholder democracy hinges on the advice’s … Read more
In 2014, Diane Straka, along with three male associates, formed a corporation for the purpose of providing accounting services. Each of the founders was an officer, director, and 25 percent shareholder of the new entity. A problem soon emerged: One of the corporation’s employees taunted Straka with sexist jokes and cartoons in the office, and her fellow shareholders refused to rein him in. Additionally, Straka’s work was undermined by some of her co-owners, who condescended to her and countermanded her decisions. Eventually, Straka left the firm and brought a lawsuit in New York State court alleging shareholder oppression. Oppression is … Read more
This summer was the summer of the cicadas. The dull hum of their song permeated the solitude of an evening stroll, along with the disconcerting crunch as pedestrian attempts to avoid squashing the creatures inevitably failed. Every seventeen years the beady-eyed cicadas emerge from underground—a natural wonder, perhaps therefore to be forgiven for their uncouth habits and off-putting appearance. As eighteenth century farmer and self-taught naturalist Benjamin Banneker, having observed three appearances of cicadas, wrote:
[I]f their lives are Short they are merry, they begin to Sing or make a noise from the first they come out of Earth … Read more
Almost all countries have historically allowed businesses to write off interest expenses against taxable income. Critics argue that the tax-favored status of debt has created a corporate debt pile-up, thereby exacerbating economic downturns. This argument, which gained more attention after the 2008 global financial crisis, implicitly assumes that the tax incentives have led to a large increase in the use of debt. However, despite extensive efforts by researchers, it is an open question whether the tax incentives are indeed a primary determinant of corporate debt policy. This is mainly because isolating the impact of interest deductions from other tax effects … Read more
In recent years, the concept of “corporate purpose” has been invoked as a shorthand to address a corporation’s commitment to include stakeholder governance—and with it commitments to sustainability, diversity, inclusion, social responsibility and other ESG issues—as part of a corporate strategy that achieves sustainable long-term growth and creates long-term value for the benefit of all stakeholders.
Recognizing the importance of corporate purpose in helping guide efforts to build back better following the pandemic, a distinguished group of academics at Oxford University formed the “Enactment of Purpose Initiative.” The Initiative seeks to encourage the elemental constituencies of a corporation—directors, management, asset … Read more
Quarterly financial reports are an important way for companies to communicate with the capital market, and they clearly affect firms’ access to debt and equity capital. However, the most scarce and sought after resource for many modern, cash-rich companies is not financing but people: human capital. For example, 27 percent of U.S. employees voluntarily changed jobs in 2019, costing firms an estimated $475 billion. For perspective, the total interest expense reported by public companies was $467 billion, indicating that the cost of voluntary employee turnover is comparable to firms’ external cost of debt. Total turnover-related costs are even larger when … Read more
During its last legislative session, the New York Senate passed the Twenty-First Century Anti-Trust Act, which, if enacted, would have amended the Donnelly Act, New York’s antitrust statute. While the bill did not come to a vote in the Assembly before the session ended, one of the bill’s sponsors has indicated that it may be re-introduced in the next session. This is the second time in recent years that a bill was introduced to amend the Donnelly Act, and this iteration is more expansive than the prior proposal, which we discussed in a prior memorandum. If this or … Read more
In a new article, Liberating the Market for Corporate Control, we recommend that state corporate law statutes be amended to include a safe harbor for hostile bidders who make all-cash, all-shares tender offers that include a guarantee of the same or higher price if a back-end or squeeze-out merger occurs. Thus, in the face of a non-coercive hostile bid, a board cannot use takeover defenses, such as a poison pill or other statutory defense, unless specifically provided for in the corporate charter. In this way, if the board and shareholders agree, a company can always use private ordering to … Read more
Which countries provide the strongest investor protection laws? How are such laws related to the level of capital market development and ownership concentration in public companies? In a series of influential works, La Porta, Lopez-de-Silanes, Shleifer and Vishny (1997, 1998, 1999) report that investor protection laws are largely determined by a country’s legal origin, with common law countries generally providing the strongest ones. These scholars also contend that countries with the strongest such laws tend to have the most developed capital markets and the least concentrated ownership of shares in their largest public firms. Further, the scholars advance a … Read more
The Supreme Court’s now-concluded October Term 2020 marked a slow return to normalcy following the disruption of the Covid-19 pandemic. The Court released only 56 signed opinions — just a handful more than the prior Term, and well below the Roberts Court’s pre-pandemic average pace of 74. Meanwhile, the Court continued a recent trend of robust activity on its so-called “shadow docket,” where it often resolves thorny issues presented in an emergency posture without oral argument and without a supporting description of its reasoning. Resolved in this way were a number of commercially significant issues implicating pandemic-related emergency measures. But … Read more
Companies are under increasing pressure to manage their reputations on environmental, social, and governance (ESG) issues. Some companies have lost revenue, gone bankrupt, been boycotted by customers, or otherwise suffered a decline in value because of a negative reputation on ESG. We refer to the risk of this decline in value as ESG risk. Managing ESG risk, adequately informing investors of ESG risk, and increasing financial support for sustainable activities are primary concerns of public companies and their regulators. The U.S. Securities and Exchange Commission (SEC) and the European Commission recently issued public statements and taken actions toward achieving these … Read more
The social and political disruptions of the past year have heightened the awareness of diversity challenges, including at public and private companies in the U.S. In particular, the representation of women and other diverse individuals in the boardroom is of continuing relevance. Last month, Deloitte and the Alliance for Board Diversity published a comprehensive report analyzing the current makeup of boards of directors at Fortune 500 and Fortune 100 companies. That report concluded that the composition of boards at the country’s largest companies has not changed materially in the last several years. Against this backdrop, a number of … Read more
Venture capital and private equity funds are important equity investors in private companies (Hand 2005; Stromberg 2008; Kaplan and Stromberg 2009), and their investments are characterized by an extensive search process that imposes significant upfront costs for the funds (Chen et al. 2010; Teten and Farmer 2010; Gompers et al. 2016, 2019). We hypothesize that private companies’ public financial statements (and the information therein) can mitigate these costs by providing a relatively less costly screening tool to identify potential targets at the pre-investment stage. In particular, public financial statements can help VC and PE funds to identify potential investment … Read more
On July 9, President Biden signed a wide-ranging Executive Order on “Promoting Competition in the American Economy” which, among other things, encourages “the Attorney General and the Chair of the FTC . . . to review the horizontal and vertical merger guidelines and consider whether to revise those guidelines” in order “to address the consolidation of industry in many markets across the economy.”
In response, the Acting Assistant Attorney General for the Antitrust Division of the Department of Justice (DOJ) and the Chair of the Federal Trade Commission (FTC) issued a statement announcing that the agencies will undertake a review … Read more
Climate change disclosure ranks among the priorities of Gary Gensler, the new chair of the Securities and Exchange Commission. With the rapid reallocation of capital to green investments – characterized as a “tectonic shift” by BlackRock and a “frenzy” by the Wall Street Journal – concerns have arisen about whether disclosures accurately portray firms’ commitment to protecting the environment or simply represent “greenwashing.” Intensifying climate change and commensurate increases in political and financial support for positive environmental actions reinforces how climate change disclosures have become a priority.
As regulators try to determine what types and amount … Read more
The Financial Conduct Authority recently announced a proposal for a climate-related financial disclosure regime for UK asset managers, as well as life insurers and FCA-regulated pension providers. This is an important step in the United Kingdom’s implementation of a regime that is similar to the European Union’s Sustainability Finance Disclosures Regulation (“SFDR”), although the United Kingdom’s regime for the time being focuses exclusively on climate-related disclosure, whilst the European Union’s regime encompasses environmental, social and governance considerations.
As under the EU regime, the FCA focuses on disclosure, with a view to influencing investors to commit capital to companies and projects … Read more
Over the past 50 years, the financial markets have been rocked by major shocks, which have led to the introduction of financial instruments that could cope with uncertainty in general and extreme events in particular. To manage the uncertainty surrounding the financial markets, there was a need for reliable uncertainty indicators. The traditional measure of uncertainty―stock volatility―has been challenged by advanced statistical methodologies (GARCH) and derivatives-based forward-looking forecasts (VIX). In a new paper, we discuss the history of volatility and uncertainty measures, their informativeness, and the information derived from volatility derivatives.
Volatility measures (simple historical volatility, ARCH/GARCH, and the VIX) … Read more
Delegated asset management, and mutual funds in particular, have become the investment vehicle of choice for retail investors in capital markets worldwide. At the end of 2020, open-end mutual funds had a total of $63 trillion in assets under management globally, and almost half of all U.S. households owned shares of a mutual fund (2021 Investment Company Fact Book).
While there are clear benefits to professionally managed and diversified investment funds, the potential for agency conflicts have long been a concern. Historically, financial regulators have relied on disclosure requirements for funds as the solution to these potential conflicts. … Read more
Antitrust enforcement is garnering headlines everywhere—from Lina Khan taking the helm at the Federal Trade Commission (FTC) to the recent dismissal of the FTC’s and state attorneys’ general complaints against Facebook. While these headlines reflect a healthy debate about the extent of regulatory enforcement, a remarkably bipartisan consensus is emerging around increased vigor in merger enforcement. Drawing support from a broad array of constituencies—from those worried about increasing concentration of economic power to those worried about the power of big tech to limit social discourse—proponents of increased enforcement advocate for heightened merger standards. Absent legislative changes (which certainly have been … Read more
On June 25, 2021, the Federal Deposit Insurance Corporation published new guidance for resolution plans to be filed by insured depository institutions with $100 billion or more in total assets. The guidance establishes a three-year filing cycle for these IDIs, with filers clustered into two groups; provides details regarding the content that filers will be expected to prepare; creates greater flexibility with respect to the incorporation of content from other sources; allows affiliated filers to submit a single, combined submission; and streamlines some of the content requirements that have proven to be less relevant to the FDIC after reviewing plans … Read more
In 2020, over 98 percent of the 40 million firms that disclosed detailed financial statement information worldwide were privately owned. Given their economic importance, the social value (or cost) of regulating private firm disclosures is likely significant, and how much to regulate these disclosures has been a central topic of debate among regulators. Key to informing this debate is understanding the potential spillover effects of these disclosures. While emerging research has made progress in investigating both the determinants and firm-level costs and benefits of private firm disclosures, relatively little is known about the spillover effects of these disclosures.
In a … Read more
When a company signs a contract containing a forum selection clause, it is clearly bound by that provision. But what about its parent company? Its subsidiaries? Its affiliates? Are these non-parties likewise bound by the forum selection clause?
The answer to this question, as it turns out, is surprisingly complex. On the one hand, it is a well-established principle of contract law that a party may not be bound by an agreement without its consent. On the other hand, the courts have over the years recognized a number of doctrines – including the law of third-party beneficiaries, equitable estoppel, agency, … Read more
Do lawyers report evidence of material violations up-the-ladder at the companies they represent, as the Sarbanes-Oxley Act and related regulations require? Have general counsel properly investigated those reports? Can we trust lawyers to be effective gatekeepers and stop corporate misconduct? The answers to these questions have long been elusive, because corporate wrongdoing is inherently sensitive and confidential, and the actions of elite research targets are hard to observe. As we approach the 20th anniversary of Sarbanes-Oxley, though, it makes sense to revisit these questions and to evaluate the impact of one of the statute’s most controversial provisions, Section 307. … Read more
On June 11, 2021, the Securities and Exchange Commission (the “SEC”) released Chair Gary Gensler’s Spring 2021 regulatory agenda, which sets out the short- and long-term regulatory actions that the SEC plans to take. The agenda includes potential rulemakings specific to private funds and their investment advisers – such as amendments to the Custody Rule under the Investment Advisers Act of 1940 (the “Advisers Act”), amendments to Form PF and a potential new ESG rule applicable investment companies and investment advisers – and broader rules (and requests for comments on existing rules) that could affect … Read more
Critics have argued that the rule requiring companies to disclose the ratio of CEO compensation to employee pay is too expensive and time consuming, with the U.S. Chamber of Commerce estimating the cost to U.S. companies at more than $700 million per year. The Securities and Exchange Commission, however, has put the annual cost at about $73 million, and in 2015 its commissioners voted 3-2 to adopt the rule. Since then, income inequality has reached unprecedented levels, and the CEO-to-employee pay ratio has skyrocketed. According to the Economic Policy Institute, the ratio was on average 21-to-1 in 1965 but grew … Read more
Firms are coming under increasing pressure to close and disclose their gender pay gaps. The pressure stems from several sources, including, (i) socially conscious investors; (ii) interest groups advocating the incorporation of ESG factors into corporate decision-making and stakeholder capitalism more broadly; (iii) influential capital market intermediaries such as index providers; and (iv) regulators. For example, in recent years the U.S. Securities and Exchange Commission (SEC) has implemented new rules requiring firms to make disclosures about human capital and, more generally, has increased its focus on diversity, equity, and inclusion (DEI) initiatives within public companies.
Advocates argue that there … Read more
Numbers generally convey a sense of certainty – especially in accounting and finance. However, this perceived precision also makes it easier to use them in misleading ways. An extensive literature in political science and mass communications discusses how numbers, taken out of context, can bolster weak arguments. For instance, mortality rates are often cited to argue for certain foreign and public policies because they elicit strong feelings. However, mortality rates are complex estimates with large margins of error.
In financial disclosure, firms can use numbers to mislead and create a false impression of a firm’s outlook – potentially to the … Read more
Last year, we did a mid-year edition of our annual Thoughts for Boards of Directors to highlight key issues and considerations in managing the challenging business environment and profound upheaval caused by the pandemic. Many of these issues are still top-of-mind as the “new normal” continues to evolve, and will continue to be prominent themes in boardroom discussions. As we emerge from the pandemic, boards and management teams should continue to assess their corporate purpose, strategy, risk management procedures, and board committee structures to optimize their ability to deal with the ever-proliferating number and complexity of business risks and opportunities … Read more
The Securities and Exchange Commission recently offered a full-throated explication of its premise that investment advisers are subject to a federally imposed fiduciary standard under the Investment Advisers Act (IAA). The premise, grounded in cryptic Supreme Court dicta, served as a basis for some to advocate that broker-dealers should be subject to a similar standard in providing personalized securities recommendations to retail investors. This concept gained statutory traction in the Dodd-Frank Act, but was never codified. After a long and tortuous path, however, the SEC finally adopted a compromise two years ago in lieu of mandating a strict fiduciary … Read more
The nature of Best Execution responsibilities of market participants has been surprisingly complex in light of the evolution of trading technology and our regulatory system. My remarks highlight several facets: the NBBO, Regulation NMS and the trade-through rule, fees and rebates in trading and make-take pricing, rebate pricing tiers, proprietary data and pricing power by the exchanges, latency, and the geography of trading and post-trade opacity. These raise a variety of questions about the meaning of Best Execution. Perhaps the ambiguity in meaning reflects the Securities and Exchange Commission’s (SEC’s) desire to allow Best Execution responsibilities to evolve organically, along … Read more
Senior congressional antitrust leaders on both sides of the Capitol are taking steps to transition a long-running investigation into competition practices in the technology sector into legislative action. Activity kicked off on Friday, June 11, when the House Judiciary Committee’s top antitrust leaders introduced legislation responsive to the Committee’s final report and recommendations from the “Investigation In Digital Markets,” which the Committee formally adopted in a party-line vote on April 13. Following introduction, however, it became clear that House activity is not taking place in a vacuum. Senator Amy Klobuchar (D-MN), who chairs the Judiciary Committee’s Antitrust Subcommittee, revealed on … Read more
Antitrust is in the news to an extent that it has not been for a generation. Senator Klobuchar (CALERA), senators Lee and Grassley (TEAMS Act), and, in a series of bi-partisan bills, various members of the House of Representatives all seek to rewrite antitrust law. In particular, these bills aim to limit merger activity that is focused on acquisitions of smaller companies by larger technology companies, with the proposals ranging from presumptions of anticompetitive effects to outright prohibitions.
In a new working paper, we focus on the often overlooked implications of a change in antitrust law for venture capital, start-ups, … Read more
In a new article, I consider two methods of valuing public companies in appraisal proceedings under Section 262 of the Delaware General Corporation Law: the unaffected market price of the company’s shares and the deal price (less synergies, as applicable) that the acquirer pays in the merger.
Following their decisions in the DFC, Dell, and Aruba cases, the Delaware courts have strongly favored market-based methods of valuation in appraisal proceedings, and they have used both the unaffected market price and the deal price in appropriate cases. To be sure, each of these methods is reliable only when certain assumptions … Read more
The SEC recently closed its period of public comment on the topic of climate-change disclosures after receiving hundreds of submissions. The comments, not surprisingly, reflected a range of views regarding climate-related disclosures, including whether the SEC should or must limit itself to requiring only financially material. These comments are the latest in an ongoing discussion among SEC Commissioners and staff, lawmakers, public companies and investors about the propriety, drawbacks and potential scope of SEC rulemaking mandating climate-related information. And they come about as SEC Chair Gary Gensler begins implementing his rulemaking agenda, with the new chairman changing the leadership of … Read more
The U.S. Securities and Exchange Commission has indicated that ESG disclosure regulation will be a central focus of recently confirmed SEC Chair Gary Gensler’s tenure. At the top of the agenda is climate change disclosure, and the Commission is taking steps toward broader reform. Then-Acting Chair Allison Herren Lee announced in March that the SEC will be “working toward a comprehensive ESG disclosure framework” and pursuing initiatives such as “offering guidance on human capital disclosure to encourage the reporting of specific metrics like workforce diversity, and considering more specific guidance or rule making on board diversity.” Acting Chair Lee also … Read more
There is a quote that is commonly misattributed to Mahatma Gandhi: “First they ignore you, then they laugh at you, then they fight you, then you win.”
At the regular get-togethers in the responsible investment industry, war stories are frequently exchanged about the amused responses to environmental, social and governance (ESG)-related pitches; the confusion; the doors shut in faces. There are plenty of examples of the first two stages of the process.
It should be heartening therefore for the responsible investment industry to discover that it has matured to the extent that some of its more common shared understandings are … Read more
In recent years, investors and others in the financial community have devoted increasing attention to the role of sustainability in financial markets and the economy at large. Sustainability is now seen as an alternative form of risk management, a way to create and preserve non-monetary value for future generations, and an area in which markets and clients expect financial institutions and corporations to take significant action. With research showing that investors consider sustainability and ESG ratings in their investment decisions, accounting and investor-relations professionals are including ESG reporting and related strategies in their financial communications, including in analyses of initial … Read more
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
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
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:
- 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
… Read more
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
The complaint filed in Franchi v. Multiplan Corp. et al. in the Chancery Court of Delaware on April 9, 2021 , 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
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
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
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
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
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
… Read more
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. This phenomenon … Read more
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 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
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
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
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
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
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
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
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
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
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. 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
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 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
Last week, the House of Representatives passed the “Insider Trading Prohibition Act” (“ITPA”). 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
On May 19, 2021, the SEC approved Nasdaq’s proposed rule change 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
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
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
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
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
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
The Securities and Exchange Commission (the “SEC”) has adopted interim final rules 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 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
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:
… Read more
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. 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
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
… Read more
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
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
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
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?”
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. As a result, for the first time, … Read more
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. “With technology driving rapid change in the payments landscape,” … Read more
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
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
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
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
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
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  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
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. 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
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
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
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
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
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
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
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. For example, contracts … Read more
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; Professors Jill Fisch, Asaf Hammadi, and Steven Davidoff Solomon (“FHDS”) counter that the Big 3 have sufficient competitive … Read more
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 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
On April 22, a unanimous U.S. Supreme Court held in AMG Capital Management, LLC v. Federal Trade Commission 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
In 2008, the world ushered in the blockchain era with a whitepaper posted pseudonymously in an online discussion of cryptography under the name “Satoshi Nakamoto.” That paper formed the foundation for Bitcoin, the first blockchain-hosted cryptoasset, 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. Today, there are more than 9,000 different cryptoassets with a total market capitalization that has exceeded $2 trillion, and we are long past the wild, wild west of unregulated crypto activity. … Read more
In December 2020, Nasdaq asked the Securities and Exchange Commission (SEC) to approve a new boardroom diversity rule. 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
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
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
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
A recent report by KPMG  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
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
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
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
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
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
Recently, workers at Amazon dealt what has been called a “decisive” and “crushing” blow to organized labor, 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
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
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
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
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
The new Article 22 EU Merger Regulation (EUMR) Guidance 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.
- 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
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
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
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
Investors are flocking to companies with good environmental, social, and governance (ESG) scores and are threatening to shun companies with poor ones. For many investors, ESG scores are critical to a company’s long-term profitability, not to mention its impact on people and the planet. But there is good reason for skepticism about the trustworthiness of the underlying metrics. For example, there is little correlation among the scores that different ESG ratings services assign to the same companies.
This situation is not inevitable. Despite their huge differences, the practices developed in financial reporting over many decades can contribute to the emerging … Read more
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
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
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, I … Read more
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, investors are increasingly using ESG factors in decisions about how to allocate their capital. 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), to a growing number … Read more
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
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
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
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
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
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 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
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. The SPAC boom has only accelerated in 2021, with over 200 SPACs raising nearly $70 billion by the start of March.
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
There’s reason to believe that M&A will rebound in 2021, according to Ernst & Young research. Nevertheless, the multifarious challenges created by the Covid-19 pandemic have significantly altered the climate for acquisitions. 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).” Despite that acknowledged need to focus early on firm integration, many … Read more
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.  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
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
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
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
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
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
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
The explosive growth in Special Purpose Acquisition Companies (“SPACs”) 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, acting Director of the SEC’s Division of Corporate Finance John Coates, and the SEC’s Office of Investor Education and Advocacy, as well as … Read more
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
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
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
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
In 2017, France introduced a pioneering piece of legislation: the Loi de Vigilance (the “LDV”), which inserted … Read more
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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. 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. 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
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
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.” 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.”
Yet while the consensus (and evidence) … Read more
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
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
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.
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
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
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
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
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