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
On February 4, Senator Amy Klobuchar introduced the Competition and Antitrust Law Enforcement Reform Act (CALERA), which provides for wide-ranging changes to the U.S. antitrust laws. CALERA follows the release of a report last year by the staff of the House Judiciary Committee Democrats, led by Representative David Cicilline. Senator Klobuchar’s legislation proposes significant changes to the antitrust laws but is less radical than some of the recommendations in the House Judiciary Committee report. Still, if enacted, CALERA would result in the most significant changes to antitrust law in decades, likely resulting in more aggressive merger enforcement, particularly … Read more
In a new article, I examine the regulatory goals of creating “fair, orderly, and efficient” securities markets in light of the recent issues involving trading in the shares of GameStop Corp. (GME) through the broker-dealer firm Robinhood Financial LLC. The article contributes to the literature on the regulation of securities markets by explaining what the terms “fair,” “orderly,” and “efficient” markets really mean. A fair market is a market in which average, “Main Street” investors get what they pay for. Under this definition, U.S. capital markets are generally fair because they are generally efficient. Efficient markets reflect all relevant information … Read more
On January 25th, 2021, President Biden signed Executive Order 14005, entitled “Ensuring the Future Is Made in All of America by All of America’s Workers,” (“EO”), aimed at increasing the federal government’s procurement of American-made supplies. This EO has potentially significant implications for all businesses that sell and supply products to the federal government, ranging from life sciences and health care companies to IT and software providers, defense contractors, and any other company doing business with the federal government. The order has little immediate effect, but directs agencies to seek to increase the domestically produced content of the American-made … Read more
In the spring of 2020, as the Covid-19 pandemic shut down economies around the world, pressure arose for governments to respond to the growing threat of pandemic-related market distress. In the United States, the initial proposals for government action varied in nature and focus. Some proposals targeted the financial system while a few targeted small businesses and individuals. Others were intended to bail out large businesses and specific industries. Still other proposals took a more institutional focus. In the context of bankruptcy law, many experts imagined building up the bankruptcy system as a primary bulwark against a seemingly imminent wave … Read more
On February 4, 2021, Senator Amy Klobuchar, chair of the Antitrust Subcommittee of the Senate Judiciary Committee, introduced a bill entitled “The Competition and Antitrust Law Enforcement Reform Act” (the “Bill”). If enacted, the Bill would fundamentally revise longstanding U.S. federal antitrust laws by forcing the merging parties to shoulder the burden of proof in a variety of common combination scenarios, and would provide regulators with various other powers and augmented resources. In particular, the Bill would position regulators to more aggressively pursue transactions involving nascent or potential competitors, which have also faced heightened scrutiny under European competition laws.
The … Read more
Just before year end, the Department of Labor finalized its new rules on ESG investing and voting for retirement and pension funds. The rules sharply restrict the ability of the fiduciaries of retirement and pension funds to make investments based on ESG factors or to vote shares held by such funds in favor of ESG issues. The rules are unlikely to prove popular with the Biden administration, but regardless of how long they survive, the rules currently apply to trillions of dollars of investments and raise interesting questions about who will ultimately control the placement of a huge amount of … Read more
The newly released Chief Legal Officers Survey (“Survey”) from the Association of Corporate Counsel (“ACC”) is an important governance resource on s board’s responsibility to exercise oversight of a company’s legal affairs in general and the operation of its legal department in particular. The Survey confirms the overall value of a CLO hierarchically positioned to both influence corporate strategy and support the role of corporate governance.
The Survey offers a number of helpful perspectives on the interaction between legal and business matters. In that regard, the Survey data help inform the board on organizational structure and the role and … Read more
Many public policymakers and economists believe that American workers’ sharply declining share of corporate profits over the past few decades has been a major cause of increasing income inequality in the United States. To some, the explanation for this profound change in the division of the corporate pie is simple. Since the 1980s, the power of stockholders to demand corporate policies favoring their interests has drastically increased, while the leverage of working people in the corporate power structure has drastically decreased. As a result, stockholders have grabbed much more of the pie, and left workers with crumbs.
Leading public officials … Read more
As has been remarked many times, yet still never enough, Black history is America’s history – and if anything, financial regulation proves the point. When calamity hits the stock market, Black people feel it too, if not always in terms of lost savings, then certainly in terms of lost jobs when firms resort to layoffs. When charlatans peddle dangerous or risky financial products, whether stocks or mortgages, they tend to do so in our communities first. When rules are written concerning how and under what conditions individuals can access credit, or the obligations financial institutions have to their communities, we, … Read more
The transactional plumbing of corporate debt payment systems is hardly where one expects to find watershed legal moments; and it usually lives up to that mundane reputation. But every so often, real disputes emerge, and they are often doozies. Such was the case with a $1.8 billion loan facility that Revlon Inc. entered into with a syndicate of lenders half a decade ago. This particular loan, in fact, had the honor of being embroiled in controversy not once, but twice within a single year. And the second of these imbroglios seems destined to cast a long shadow on the law, … Read more
A recent SEC conditional no-action position (the “No-Action Statement”) has further opened the regulatory door to trading of digital asset securities (“DAS”), by allowing certain limited purpose DAS-only broker-dealers to maintain custody of these securities on behalf of customers. As firms have sought to develop trading systems for DAS, questions regarding whether or how broker-dealers could custody these securities for customers in compliance with SEC rules has been one of the primary regulatory hurdles. Efforts to meet the SEC staff’s prior guidance that broker-dealers generally could not custody DAS for customers triggered somewhat cumbersome workaround attempts. … Read more
Rule 10b-5, the federal antifraud catch-all, applies to both public and private company securities. Yet the voluminous case law, and the related scholarly literature, has focused primarily on public corporations and markets.
This state of the world sufficed for a time. Most corporations of significant size had publicly-traded stock and faced the threat of securities class actions. By contrast, private corporations generally issued stock through private placements to sophisticated investors, and there was little secondary trading in their stock. Startups typically were acquired or went public within a few years, and valuations did not surpass, or even approach, the … Read more
Notwithstanding the ongoing spread of COVID-19 and unprecedented changes in daily life and the economy, the second half of 2020 marched on to the steady drumbeat of securities-related lawsuits we have observed in recent years, including securities class and stockholder derivative actions, insider trading lawsuits, and government enforcement actions. In this 2020 year-end edition of our semi-annual publication, we discuss developments in the securities laws that have occurred against this backdrop.
The year-end update highlights what you most need to know in securities litigation developments and trends for the second half of 2020:
- Federal securities filings decreased by approximately 22%
… Read more
Regulation Fair Disclosure (“Reg FD”) is commonly believed to prohibit managers from disclosing information about their firm to select shareholders. But managers are in fact allowed to do so in several circumstances. Specifically, Reg FD exempts communications to shareholders who will not trade on the information and to companies’ customers, suppliers, and strategic partners. In a new article, we exploit an understudied setting where large shareholders and firms enter into bilateral contracts that entitle the shareholders to receive specific information privately from management. We find that, after the execution of such contracts, firm performance improves and the amount of public … Read more
On Thursday, February 4, 2021, the Federal Trade Commission (FTC), with the concurrence of the Department of Justice’s Antitrust Division (DOJ), announced that it had suspended the process by which requests for early termination of Hart-Scott-Rodino Act (HSR Act) waiting periods are granted, potentially signaling a more aggressive approach to merger review.
- For the foreseeable future, filing parties must in all cases wait for the full 30-day waiting period to expire before closing.
- The rule applies to currently filed transactions and to any new filings.
- The shift in practice by the FTC and the DOJ may preview a
… Read more
As the Covid-19 pandemic continues to disrupt the global economy, regulators are struggling to find cost-effective mitigation strategies. The goal of such strategies should be simple: Reduce the spread of the virus, while causing the least amount of damage to people’s everyday lives, including economic activity. Yet, the diverse measures taken by governments only seem to have limited success in achieving that goal. Given that current estimates of the economic damage are tens of trillions of dollars, figuring out why some Covid-19 mitigation strategies still fail should be a top priority. In a new paper, we attempt to do exactly … Read more
The recent meteoric rise (and subsequent fall) of GameStop, AMC Theaters and a host of other “meme stocks” has prompted hedge funds, investment bankers, regulators and public company executives to critically re-examine their preparedness for extraordinary market volatility.
The meme stock phenomenon is unique in numerous respects that have been well documented. What has drawn less attention, however, is the fact that the phenomenon highlights how other “mid-cap” companies could become the next meme stock – or be subject to highly volatile stock price movements that may not be identical to what transpired at GameStop and AMC, but are dramatic … Read more
It is becoming clearer to investors and corporate managers that material environmental, social, and corporate governance (ESG) issues need to be managed as part of an organization’s business strategy. Climate change, racism, economic inequality, water scarcity, cybersecurity threats – these are just a few of the material ESG issues posing risk and opportunity.
Unfortunately, our research finds that board members may not be up to the task. We analyzed the credentials of each of the 1,188 Fortune 100 board directors based on Bloomberg and company biographies in 2018 and found that 29 percent had credentials (such as board memberships and … Read more
Transactions by special purpose acquisition companies, or SPACs, exploded in 2020, resulting in a 320% increase in the number of SPAC initial public offerings (IPOs) compared to 2019. SPACs have been around for 15 years and now are established as a legitimate alternative to a traditional merger or IPO. This is due in part to an evolution of the SPAC vehicle, which now offers enhanced investor protections and positions sophisticated managers as “sponsor teams” that guide the company through both the SPAC IPO and the de-SPAC process, as further described below. SPAC prevalence is set to continue through 2021, with … Read more
Private meetings between management and investors occur worldwide and are generally held at corporate headquarters with invited investors and sell-side analysts (a.k.a., site visits). Ng and Troianovski (WSJ, 2015) report that U.S. investors pay $1.4 billion a year to securities firms that can arrange face time with executives. These meetings differ from other management-investor interactions such as investor conferences and analyst or investor days in that they are generally not publicized in advance and their content may never become public unless hosting firms are required to publish the meeting details by regulation. Since 2009, the Shenzhen Stock Exchange (SZSE) in … Read more
Companies with dual class shares have, as the term suggests, two (or more) classes of common stock. One class gives its holders voting power proportionate to their equity shareholdings. The other offers a group of shareholders, normally corporate insiders, weighted voting rights, which allow the insiders to retain control with less than majority ownership of the company.
The recent wave of high-profile technology giants, from Google to Facebook, that have gone public with dual class shares in the U.S. has led to the revival of the use of such share structures. Dual class shares have also gained traction among policymakers … Read more
Thank you for inviting me to speak with you all today. The President named me as Acting Chair just a few weeks ago, and I’m incredibly excited about the opportunity to lead the FTC in these challenging times. It is fitting that one of my first speeches in this new capacity will be about privacy and data security, because these issues are so important to consumers, to the FTC, and to today’s information economy.
I want to direct my remarks today to some questions you may be asking—where is the FTC headed? What’s new and different at the FTC under … Read more
The Dodd-Frank Act, enacted in 2010 in the wake of the Great Recession, introduced mandatory stress-testing for the largest U.S. banks. Dodd-Frank Act Stress Testing (DFAST) was intended to ensure that banks have sufficient capitalization to absorb the losses they may experience in an economic downturn and, more importantly, continue providing credit to the economy. The stress-testing exercise, which is conducted by the Federal Reserve, uses hypothetical macroeconomic scenarios to predict a bank’s portfolio return under stress and its implied equity values. Thus, the exercise indicates whether a bank, given its current equity position and portfolio allocation, could withstand a … Read more
The concept of mandatory corporate human rights due diligence is gaining momentum, both within Europe and on the international stage
In this two-part alert, we examine key global legislative developments and proposals on this important topic. In Part One, we look at very recent steps taken by the institutions of the EU towards implementation of legislation at a pan-European level. In Part Two, we will consider developments at a national level within the EU and also look beyond Europe as we discuss the position in APAC, the US and Canada.
Mandatory Corporate Human Rights Due Diligence: EU Developments
What exactly … Read more
Holders of large blocks of a company’s shares are pervasive in developed economies. La Porta et al. (1999) find that only 17 percent of large firms in countries with strong shareholder protection qualify as widely-held, and Holderness (2009) shows that 96 percent of large U.S. firms have blockholders who own at least 5 percent of a company’s stock. Blockholders influence corporate policies in many ways, with voting being arguably the most important, as it empowers shareholders to elect directors, approve major corporate transactions, and decide on governance issues. Since voting rights and dividend rights are bundled together in shares, blockholders’ … Read more
For the next several weeks and months, intense focus will be trained on determining the priorities of the Biden administration. We believe that at the Securities and Exchange Commission (“SEC”), the new administration will ramp up examinations and investigations of investment advisers, and specifically advisers to private funds.
The industry has certainly been in growth mode. By the SEC’s own calculations, the number of private funds increased by nearly one third during the past four years (from 26,840 funds in the first quarter of 2016 to 34,858 in the first quarter of 2020), and the aggregate net asset value increased … Read more
In our recent paper we discuss the European regime governing the disclosure of inside information. In particular, we try to find an answer to the question of which duties of the disclosure regime have been violated in two situations: where i) inside information is selectively disclosed to third parties and ii) the confidential nature of the inside information is no longer ensured if the disclosure of that information has been delayed. The requirements of the public disclosure of inside information are set out in Article 17 of the Market Abuse Regulation (MAR). The issuer’s primary duty to disclose inside … Read more
Much has been reported in the media about the efforts of the Committee on Foreign Investment in the United States (CFIUS) to investigate — and, where appropriate, mitigate, or even divest — transactions that the parties did not submit to CFIUS for review before they were consummated (so-called “non-notified transactions”). A recent Wall Street Journal article called attention to this worrisome trend, noting the Committee’s growing sophistication, enhanced funding for this outreach, appetite for investigating years-old investments, and leveraging of both the intelligence community and publicly available resources.
Although CFIUS outreach has long been a risk factor for the investment … Read more
Many corporate law scholars watched in amazement as merger litigation exploded over the past 15 years. In 2005, only 37 percent of mergers involving U.S. public companies and with a transaction size of at least $100 million were challenged in court. Today, approximately 85 percent of such mergers are challenged in court. And these suits look different from the merger suits of the past. Instead of money, for example, shareholders today typically receive additional disclosures about the merger that have little value. Instead of being filed in Delaware and other state courts, more cases are brought in federal court. And … Read more
As we write this memorandum, a new administration is forming in Washington, with new leadership teams being nominated at DOJ, SEC, CFTC and other regulatory and law-enforcement agencies — thus prompting the question of what these changes may portend for white-collar and regulatory enforcement priorities, trends and policies. Having watched many administrations come and go over the years, our sense is that, in this area at least, continuity tends to prevail over disruption. That said, we can offer the following educated guesses on what to expect going forward:
- At DOJ, it is highly likely that the basic framework governing charging
… Read more
The Big Three passive fund managers (BlackRock, State Street, and Vanguard) have roughly quadrupled their collective ownership stake in S&P 500 companies over the past two decades (Hirst and Bebchuk, 2019). This enormous increase in ownership by passively managed funds raises questions regarding the corporate governance of firms because it is unclear to what extent passively managed funds have the incentives to monitor their portfolio firms. Reduced monitoring and oversight in aggregate can open the door to executive entrenchment, inefficient corporate investments, and inattention to long-term risks.
Passive funds primarily compete on both price and performance with other … Read more
On December 4, 2020, the Securities and Exchange Commission announced that it had settled charges against The Cheesecake Factory for making material misstatements concerning the impact of COVID-19 on its business operations and financial condition. The settlement resolved charges pursuant to Section 13(a) of the Securities Exchange Act of 1934 and Rules 13a-11 and 12b-20 thereunder concerning statements that The Cheesecake Factory had made in press releases attached to Current Reports on Form 8-K dated March 23 and April 3, 2020. Of particular concern to the SEC were statements by The Cheesecake Factory that its restaurants were “operating sustainably” … Read more
What a difference a week makes! Almost two weeks ago, the frenzied discussion of GameStop assumed that a proletarian revolution was in progress, that the masses had organized themselves through Reddit and Robinhood, and that they were marching on the bastions of the evil short sellers, who had long held these serfs in subjugation. “Investors of the World Unite! You have nothing to lose but your chains,” proclaimed the zealots on WallStreetBets. A week later, it was clear that the revolution had failed. GameStop had fallen from well over $400 a share to the low $60s on Thursday — much … Read more
On January 13, 2021, prominent whistleblower attorney and a principal architect of the Dodd-Frank Act whistleblower program, Jordan A. Thomas, filed a complaint against the U.S. Securities and Exchange Commission (“SEC” or “Commission”) seeking a declaratory judgment that certain provisions of the SEC’s recent whistleblower program amendments are invalid and cannot be enforced. Specifically, the complaint challenges the SEC’s “clarification” of its authority to limit the size and number of certain whistleblower awards.
Under Dodd-Frank, the Commission pays a monetary award to a whistleblower that provides information to the SEC that leads to an enforcement action in an amount … Read more
The pandemic has blown huge holes in most state budgets. Now, with the advent of the Biden Administration and a Democratic Congress, there is a reasonable chance that substantial federal aid is coming – finally.
Given this turn of events, states may conclude that it no longer makes sense to borrow to handle budget shortfalls. This would be a mistake. The new round of relief has not yet passed, and it is unclear whether it will be sufficient either in general or as to particular states. It is also unclear whether it will be enough as the crisis unfolds… Read more
Last year, Latham & Watkins sounded a hopeful note that 2020 would provide a clearer vision than 2019 for the regulation of digital assets in the US. In the wake of the emergence of COVID-19, priorities changed, along with forecasts and expectations. The second and third quarters of 2020 had regulators of all stripes in triage mode, and any attention they may have directed at cryptoassets was understandably shelved. On the other hand, far from sidelining digital asset growth, the pandemic appears to have spurred further innovation and adoption. Regulators are now continuing to reckon with an asset class that … Read more
The escalating debate over corporate purpose is not confined to developed economies in the West. Rapidly developing economies in nations like India are similarly grappling with how to define and develop a legal framework around corporate purpose. Corporate social responsibility (CSR) and a re-examination of corporate purpose have been at the centerpiece of discussions about corporate governance reforms in India. In a new book chapter, I discuss the lessons that can be learned from India’s experience with corporate purpose.
For over a decade, India has taken a multi-pronged approach toward redefining corporate purpose. Voluntary guidelines issued by the Indian Ministry … Read more
Deal activity (or inactivity) for much of 2020 was driven first by the unprecedented uncertainty and massive global shutdown of the early days of the Covid-19 pandemic, and then propelled by rising markets and confidence as animal spirits anticipated the light at the end of the tunnel, even against a backdrop of political instability and record levels of infection and death. Indeed, for M&A, 2020 was a tale of two halves: the second lowest first-half global M&A volume in the last decade (approximately $1.2 trillion), followed by a 90% increase in the last six months (to approximately $2.4 trillion), for … Read more
Members of the academic community, the business world, and law firms have long been debating shareholder primacy, stakeholder governance, and corporate purpose. In a forthcoming essay, I outline these arguments but suggest that reform of corporate governance should be focused on executive compensation and compelling fiduciaries subject to ERISA and other legal regimes to protect retirement savings. In my opinion, the financialization of corporate governance fomented by activist investors that led to compensating executives with equity is the primary cause of the dissatisfaction with corporate performance by non-shareholder constituencies.
My essay traces the development of the financialization of corporate governance … Read more
As we wrote toward the end of 2020, the risks associated with business and human rights, and ESG more generally, have led a growing number of companies to create human rights/ESG management systems or to integrate human rights/ESG into existing compliance programs. Relying on the UN Guiding Principles on Business and Human Rights (“UNGPs”), we listed six core elements of human rights/ESG compliance programs – which are generally part of effective international regulatory compliance programs. We promised to provide detailed posts regarding each individual element where we will discuss the key components of that element and how its presence in … Read more
The Code of Conduct for United States Judges affirmatively encourages federal judges to engage in those extrajudicial activities, such as writing articles, that are intended to help improve the administration of law. But for most of my first two decades on the bench, I largely avoided this recommendation, partly because, like most judges, I was very busy conducting the business of my court, and partly because, like many judges, I took a certain perverse pleasure in remaining aloof. But finally the very disturbing tendencies that I observed enveloping the American system of justice got to me, and I felt the … Read more
Section 1061 of the Internal Revenue Code was enacted as part of the 2017 Tax Cuts and Jobs Act to create greater parity between the tax treatment of ordinary income and capital gains attributable to carried interest. The basic statutory framework applies by recharacterizing certain long-term capital gain (“LTCG”) as short-term capital gain (“STCG”), unless either an extended holding period is satisfied (three years, as compared to one year) or an exception applies. In August, 2020, the Treasury Department and the IRS issued proposed regulations (the “Proposed Regulations”) interpreting Section 1061, which were complex and restrictive in many respects, and … Read more
For over a decade, hedge funds and other sophisticated traders have taken advantage of ordinary Americans who sought to share in the rewards of entrepreneurship and economic growth by investing in public companies. My research has identified tens of billions of dollars of transitory price crashes from short attacks aimed at retail investors on social media. Until last week, it appeared that GameStop was on its way to becoming yet another target of the activist short-selling machine. This was the week that investors decided to fight back.
“Negative activist” hedge funds mastered the art of driving down share prices via … Read more
On December 15, 2020, Ireland’s Data Protection Commission (“DPC”) announced its decision to fine Twitter International Company (“Twitter”) €450,000 for failing to notify the DPC promptly of a data breach affecting EU personal data in compliance with the EU General Data Protection Regulation (“GDPR”). The decision received all the press coverage that is to be expected for any decision involving Big Tech and was the largest GDPR fine issued by the DPC to date. However, the significance of the decision really lies in the message that Controllers cannot escape their breach notification obligations due to failures on the part of … Read more
Over the course of 2020, market forces drove corporations and institutional investors to make expansive commitments to their purpose and social responsibility. This fueled companies in many regions to publish lengthy reports under the ESG moniker (Environmental, Social and Governance). The volume of individual company disclosures will almost certainly increase dramatically in 2021. Will the quality of disclosures improve? How should these disclosures be integrated into the presentation of fundamental business performance?
In the U.S., the Securities and Exchange Commission has been noticeably absent from the intensifying public debates on the E and the S of ESG. It already addresses … Read more
Last year, Latham & Watkins sounded a hopeful note that 2020 would provide a clearer vision than 2019 for the regulation of digital assets in the US. In the wake of the emergence of COVID-19, priorities changed, along with forecasts and expectations. The second and third quarters of 2020 had regulators of all stripes in triage mode, and any attention they may have directed at cryptoassets was understandably shelved. On the other hand, far from sidelining digital asset growth, the pandemic appears to have spurred further innovation and adoption. Regulators are now continuing to reckon with an asset class that … Read more
Research in finance and accounting consistently documents that a significant number of managers overstate reported earnings when true earnings miss a benchmark . Managers face strong incentives to meet and beat important earnings thresholds, such as the analyst consensus forecast of a corporation’s next period future earnings per share (EPS), because capital markets react negatively to firms falling short of earnings expectations . Hence, there is a widespread belief that managers “cook the books” in order to meet these benchmarks.
The accounting and corporate governance literature offers at least two ways to curb earnings management: carefully scrutinizing managers  and … Read more
The Delaware Court of Chancery provided its latest guidance on so-called Caremark claims in a New Year’s Eve opinion issued by Vice Chancellor Glasscock in Richardson v. Clark, an action brought derivatively by a stockholder of Moneygram International, Inc. The opinion dismissing the claims, in which the Court had some fun with film titles from Tom Cruise’s career, provides an important level-setting because some have questioned whether Delaware’s courts are lowering the bar for claims alleging that a board of directors failed in its oversight duties. Richardson should provide some comfort to directors that the standards have not changed: … Read more
The U.S. experienced an unprecedented number of home foreclosures during the Great Recession of 2007-2009. To limit defaults and deadweight losses, the government implemented various policies that reduced monthly payments by homeowners (i.e., Home Affordable Modification Program) and facilitated mortgage refinancing (i.e., Home Affordable Refinancing Program). These initiatives had modest success. An alternative policy proposal that was not implemented during the Great Recession would have allowed mortgage “cramdown” by judges as part of the Chapter 13 bankruptcy process. The proposal passed the House of Representatives but failed in the Senate. In these restructurings, the underwater portion of the mortgage is … Read more
On December 21, 2020, the UK Financial Conduct Authority (FCA) confirmed in a published Policy Statement (the Statement) that it will introduce a new Listing Rule (the Rule) requiring premium listed companies to state whether they have made disclosures pursuant to the Climate-related Financial Disclosures (TCFD) recommendations, and if not, why.
The Rule comes in response to the FCA’s March 2020 Consultation Paper, under which the FCA sought to enhance climate-related disclosures by listed issuers and to clarify existing disclosure obligations. The Rule is also a forerunner to the UK’s plan to fully align corporate disclosure with the … Read more
In a recent working paper, we look at what drives shareholder activism around the world and focus specifically on the role of corporate governance reforms.
While shareholder activism has been a force in U.S. capital markets for some time, the last decade has seen an explosion in activism globally, including in countries where activists have previously had little influence. Our research explores what explains this growth and focuses specifically on the role of changes in regulations and laws that facilitate activism. We develop a country-level framework of regulatory characteristics that serve as necessary precursors for minority shareholders to influence … Read more
At 11pm on December 31, 2020, the Brexit transitional period ended and the UK’s autonomous sanctions regime, consisting of approximately 30 regulations, came into force. It is largely based on the EU’s sanctions legislation that was previously implemented in the UK, but there are important differences.
Companies operating in the UK will need to ensure that their sanctions systems and controls reflect this sanctions legislation. Companies will also need to consider if these changes could affect existing contractual relationships and their approach to sanctions-related representations and warranties in the future.
UK Sanctions Legislation
The UK’s Sanctions and Money Laundering Act … Read more
The reach of American law has recently entered familiar territory: listings of international companies on U.S. exchanges. Yet the listings of Chinese companies have in particular prompted a backlash. I want to shed some light on the situation – and outline U.S. government responses to Chinese listings – given my experience bringing Chinese companies to the New York Stock Exchange (NYSE) as its group executive vice president from 1996 to 2003.
The Listings Wave
During that period, listings of foreign companies improved their transparency and governance, thanks to the listing standards of the exchanges and Securities and Exchange Commission, and … Read more
Federal financial regulatory agencies, including the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (“FDIC”), and the Office of the Comptroller of the Currency (“OCC”) (collectively, the “Regulators”), issued on December 18, 2020, a Notice of Proposed Rulemaking titled “Computer-Security Incident Notification Requirements for Banking Organizations and Their Bank Service Providers.”
Existing financial services (GLBA) regulatory guidance already requires supervised banking organizations to notify their primary federal regulators “as soon as possible” if they become aware of an incident involving unauthorized access to, or use of, sensitive customer information. However the existing requirements … Read more
The Financial Accounting Standards Board (FASB) and the Securities Exchange Commission (SEC) (collectively, “regulators”) have expressed concern over “disclosure overload,” or the concern that the sheer volume of disclosure in annual reports makes it difficult for investors to identify and incorporate relevant information into their decisions (White 2013). While academic research finds that annual reports have become longer and less readable (e.g., Dyer et al. 2017), regulators attribute disclosure overload in part to high levels of immaterial disclosure that make it difficult for investors to recognize the material, or relevant, information in these reports.
Interestingly, firms are not required to … Read more
The U.S. Department of Justice’s Antitrust Division (DOJ) has made good on a promise it made over four years ago to criminally charge companies that agree not to solicit each other’s employees in so-called “no poach” agreements or that agree not to compete on wages or salaries in so-called “wage-fixing” agreements. In the waning days of the Obama administration, the DOJ announced it would begin criminally prosecuting collusive conduct affecting labor markets; now, in the waning days of the Trump administration, the DOJ has followed through.
On January 5, 2021, a federal grand jury returned a two-count indictment charging … Read more
[Editor’s Note: This and the piece that immediately follows offer a point/counterpoint on litigation finance.] The past decade has witnessed a steady stream of innovative capital markets products. Among these developments is litigation finance – a transaction form where a non-party to a dispute provides capital to finance a litigation. Litigation finance seeks efficiently to transfer the financial risk of litigation from those who cannot (or do not wish to) bear it, to capital providers who seek to profit from voluntary exposure to the risk. But, like many other financial products, litigation finance also carries nonfinancial risks that … Read more
Here’s a familiar story for litigators. A client calls you with a strong legal claim, but she can’t afford to pay your hourly rates. And your firm won’t let you take the case on contingency. You feel hard-pressed to tell your client to look elsewhere.
Enter litigation finance: the practice where a third party provides capital to a litigant or law firm in connection with a legal claim, frequently to help claimholders finance their lawsuits – in return for a share of the proceeds from a winning case. Ten or even five years ago, most lawyers and regulators had barely … Read more
Investor conferences are an important component of a firm’s investor relations efforts. Conferences provide managers with the opportunity for face-to-face interactions with investors and analysts. Managers can use these interactions to increase firm visibility and shape external perceptions of the firm’s business operations and strategy. Prior academic research finds that conferences are important information events that are accompanied by positive price and volume reactions, increases in institutional investor and analyst following, and improvements in liquidity. The research does not, however, examine whether these conferences – or investor relations activities more broadly – facilitate managerial opportunism. In a new paper, we … Read more
On December 28, 2020, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) issued five new frequently asked questions (“FAQs”) that clarify the scope of Executive Order (“E.O.”) 13959, the basis for OFAC’s new Chinese Military Companies sanctions program. These FAQs define key terms and clarify how OFAC will interpret E.O. 13959’s prohibition against U.S. investment in the securities of Communist Chinese Military Companies (“CCMCs”), which goes into effect on January 11, 2021. In general, like previous sanctions programs, the new FAQs show that OFAC will read commonly used terms … Read more
The future of corporate stewardship – and therefore corporate governance – rests in the hands of a few large institutional investors. Questions of whether these funds have the necessary incentives to pursue stewardship have set off an explosion of research by both legal scholars and economists alike. Some say that funds lack even the basic incentives to vote on value-enhancing corporate governance matters because, while even large benefits diffuse among investors, funds bear the totality of the upfront costs. Others argue that funds – through their common ownership of nearly all public companies – have perverse incentives to … Read more
Over a year ago, on December 29, 2019, Regulation (EU) 2019/2088 on sustainability-related disclosures for the financial services sector (the “Sustainable Finance Disclosure Regulation”, or “SFDR”) entered into force. Just a few months remain before key provisions begin to apply and asset/fund managers and other financial services firms should not delay in preparing for new disclosure requirements.
The SFDR requires European financial firms to consider how sustainability risks are incorporated into their investment decision-making processes, and the extent to which their financial sector remuneration practices are consistent with sustainability concerns. In short, manufacturers of financial … Read more
Why are large private companies often characterized by poor corporate governance? WeWork provides a recent high-profile example. For reasons that now seem implausible, WeWork attracted billions of investment dollars. Perhaps it was the company’s “vision” or the sheer personality of its co-founder, Adam Neumann, or maybe there was just too much venture capital money looking for the next big thing. For whatever reasons, WeWork was valued at $47 billion in January 2019, despite having never turned a profit in a rather traditional business. By the fall of 2019, the WeWork IPO was cancelled, and the company’s value plummeted to about … Read more
A great deal of buzz has been generated by the recent decision from the Southern District of New York in In re: Nine West LBO Securities Litigation, No. 20 MD 2941 (JSR) 2020 WL 7090277 (S.D.N.Y. Dec. 4, 2020), with some commentators questioning whether the decision places directors who approve a leveraged buyout at risk of liability for the actions of subsequent boards that occur long after they cease to be directors, or expands directors’ duties beyond maximizing value for shareholders. See, e.g., Sujeet Indap, Dealmakers warn of chilling effect on buyouts from US court ruling, Financial Times … Read more
CEO outside directorships and their value to companies have been a topic of debate among a wide range of stakeholders, particularly investors, boards, and policy makers. Some argue that CEO outside directorships benefit a CEO’s own firm by opening valuable resources in other boardrooms and the corporate elite and by allowing first-hand insights into successful firm strategies. Others, particularly proxy advisers and some journalists, call connected directors “overboarded,” suggesting that outside directorships consume too much of a CEO’s time while remitting little or no value to the CEO’s own firm. Reflecting that criticism, S&P 500 CEO outside board assignments haves … Read more
Throughout December 2020, the Trump administration continued its focus on China and Russia and imposed additional export and investment controls. On December 23, 2020, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) published a final rule to amend the Export Administration Regulations (EAR) and create a new Military End User List (MEU List). A license from BIS is required for exports, reexports, or in-country transfers to persons on the MEU List for certain designated items. On December 18, 2020, BIS added 77 entries to the Entity List, most of which are Chinese entities. These actions follow the … Read more
Shareholder lawsuits have long prompted intense debate. Despite increased corporate democracy and shareholder rights, some commentators argue that shareholder litigation is still a shareholder’s best option to bring about changes. Shareholder litigation can impose personal liability on corporate managers and directors for breach of the duties of care (negligence) and loyalty (conflict of interest). However, there is a collective action problem associated with shareholder lawsuits, and some argue that the principal beneficiaries of shareholder lawsuits are attorneys.
In a recent study, we move the debate on shareholder lawsuits forward by studying the impact of shareholder litigation threats on CEOs’ employment. … Read more
On January 13, 2021, the U.S. Supreme Court heard a case, AMG Capital Management, LLC v. FTC, that could substantially curtail the primary authority the Federal Trade Commission (FTC) relies on to seek monetary relief from defendants in federal court. For decades, the FTC has used Section 13(b) of the Federal Trade Commission Act of 1914 (FTC Act) to seek billions in restitution and disgorgement in a wide range of actions, including cases concerning telemarketing and online frauds, deceptive business practices, data security and privacy breaches, and conspiracies to monopolize in pharmaceutical markets.
Section 13(b) authorizes the FTC to seek … Read more
In late 2019, somewhat surprisingly, the Business Roundtable issued a brief statement advocating “a fundamental commitment to all of our stakeholders,” thus ending its decades long singular commitment to shareholder value.
The statement triggered an intense global debate about the purpose of the modern corporation. In academia and in policy circles, new attention is now being paid to whether or not pursuit of profit is the sole obligation of the corporation. Legislation that would mandate a more significant role in corporate governance for stakeholders was introduced by Sen. Elizabeth Warren and may, in light of the commitment of the Biden … Read more
Christmas came early for many in the digital asset community by way of a statement from the U.S. Securities and Exchange Commission (“SEC” or “Commission”) on December 23, 2020 that grants relief in the area of broker “custody” of digital asset securities. The framework laid out by the SEC will operate somewhat like a hybrid no-action letter/safe harbor/pilot program, pursuant to which “special purpose” brokers may follow certain, specific steps and custody digital asset securities during a five-year program period without the risk of facing an enforcement action.
U.S. broker-dealers are subject to a multitude of laws and rules, … Read more
Late in the afternoon of the Friday before Election Day, the Department of Labor finalized a rule that requires pension and retirement plan fiduciaries to consider only financial interests when investing plan funds. On its face, the rule seems anodyne. Yet it has provoked a strong negative reaction from fund managers and others who advocate for use of Environmental, Social, and Governance (“ESG”) factors in investing.
This negative reaction is puzzling. Advocates for ESG investing, such as the United Nations and BlackRock’s Larry Fink, argue vociferously that ESG investing makes money while also doing good. The rule requires pension … Read more
In the United States this past year, growing movements for social, racial and environmental justice, and the impact of an unprecedented health crisis, have coincided with a range of institutions increasing their focus on promoting environmental, social and governance (“ESG”) initiatives as part of their businesses. Banks and other financial institutions are among those undertaking efforts to expand their ESG activities. Notably, some banks are taking these actions despite that, under the law today, they are subject to few if any regulations that promote ESG initiatives. None of the U.S. federal bank regulators, for instance, mandate expansion of ESG-related activities … Read more
Barclays, Credit Suisse, Deutsche Bank, UBS, and other foreign banks played an outsized role in the 2008 financial crisis that cost U.S. households trillions of dollars of wealth. As credit markets froze, foreign banks’ U.S. offices experienced extreme stress and relied on the Federal Reserve’s emergency lending facilities for survival. After the crisis, policymakers tried to strengthen regulation of foreign banks’ U.S. operations, which account for roughly 20 percent of the U.S. banking system. In my new article, Domesticating Foreign Finance, I contend that the United States’ post-crisis reforms were insufficient and that foreign banks continue to pose unwarranted … Read more
President-elect Biden has yet to name the officials who will oversee antitrust enforcement in his administration. Therefore, the focus of the administration’s substantive agenda remains to be seen. However, the staffs of the Antitrust Division of the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC) will continue their work as the agencies transition to new leadership. Indeed, the agencies and their career staff can be expected to continue to investigate and prosecute pending cases and receive and review merger filings. Nevertheless, there are certain ways in which the trajectory and pace of the agencies’ work might be … Read more
Disclosure and internal governance regulations are, along with accounting rules, distinguishing features of the public firm. Deregulation agendas such as those of the Trump administration typically assume that many regulations on public firms have imposed high compliance costs. Such arguments are at the center of the debate surrounding the decline in the number of public firms, changes in firm-size distribution and the growth of private equity markets.
Researchers and policy makers have extensively studied the costs and the impact of disclosure and internal governance rules (e.g., SEC, 2011; Coates and Srinivasan, 2014). However, as Leuz and Wysocki (2016) write in … Read more
The Dodd-Frank Act recently celebrated its 10th anniversary, with commentators, policymakers, and scholars joining the celebration by discussing the achievements of the sweeping post-crisis financial reform. Yet Dodd-Frank left critical unfinished business that, if not addressed, could erode the structural foundations of the post-crisis markets: the regulation of clearinghouses.
In a new article, I identify the flaws in the the current regulatory framework for clearinghouses. These flaws polarize rather than align the incentives of clearinghouses’ major stakeholders: the owners – companies such as the Chicago Mercantile Exchange Group, Intercontinental Exchange, and the London Stock Exchange Group – and the … Read more
In November, the UK Government announced a significant and wide-ranging package of reforms that, if adopted, will both recalibrate and expand its existing powers to assess and intervene in mergers and acquisitions on the grounds of national security.
The proposed reforms are set out in the National Security and Investment Bill (the “Bill”) and addition to the Competition and Markets Authority’s mergers framework under the Enterprise Act 2002.
A new Investment Security Unit (the “Unit”), which will sit within the Department for Business, Energy and Industrial Strategy, will be the point of contact for businesses with questions or wishing to … Read more
Economist Albert O. Hirschman (1970) classically set out the two alternatives facing dissatisfied members of an organization: They can voice displeasure or exit for greener pastures. Hirschman’s model has long explained the tradeoff facing shareholders of a poorly governed firm: Agitate for change or take the “Wall Street Walk” by selling shares. Professor John C. Coffee (1991) showed that large institutional investors have little incentive to voice their concerns to monitor portfolio firms, a trend exacerbated by low-fee “passive” portfolio management (Bebchuk et al., 2017).
While voice is often too costly for passive investors, exit is … Read more
On December 27, 2020, the Economic Aid Act (EAA) was signed into law to provide financial relief to small businesses suffering from the impact of the COVID-19 pandemic. The EAA amends the PPP loan program that was established earlier this year under the CARES Act. As before, the PPP loans will be low-interest, forgivable loans for specified purposes, designed to encourage businesses to keep employees on the payroll during the pandemic.
The PPP program established under the CARES Act ended on August 8, 2020. At that time, PPP loans totaling $525 billion had been issued to roughly 5.2 million businesses, … Read more
What constitutes a “current market condition” that mutual funds are required by SEC regulations to disclose? Current market condition risks arise because of changing market conditions that can affect investment performance. For some U.S.-registered funds, Covid-19 is prompting new event-specific disclosures. In 2020 Q1-Q3, we see a dramatic increase in public health-related disclosures overall, and the emergence of new Covid-19 and quarantine risk disclosures.
While the SEC hasn’t mandated Covid-19 disclosures or provided guidance to funds (as it has with operating companies), it is clear that funds are not immune to the effects of Covid-19. … Read more
The Staff of the Division of Corporation Finance recently issued CF Disclosure Guidance: Topic 11 – Special Purpose Acquisition Companies (available here). This guidance highlights disclosure considerations for SPACs at both the IPO and business combination stages, with a focus on disclosures around conflicts of interest and the differing economic interests of SPAC sponsors, directors, officers and their affiliates (collectively, “SPAC Insiders”) as compared to the interests of the SPAC’s public shareholders.
IPO Disclosure Considerations
In an effort to elicit better disclosures when a SPAC goes public, the guidance poses questions for SPACs to address in the IPO registration … Read more
Rapid technological innovation over the past five years has created unprecedented opportunities for entrepreneurs – often outside the world of traditional finance and capital markets. Cryptoassets, for example, may prove to be socially beneficial tools for enabling entrepreneurs to more efficiently raise capital, and making sure those and other welfare-maximizing financial innovations succeed has become paramount for researchers and policymakers. In a recent paper, The Leviathan of Securities Regulation in Cryptoasset Markets, I aim to assist U.S. capital market regulators in determining how best to achieve this goal.
Unlike many foreign countries, the U.S. does not have regulations tailored … Read more
In a new paper, I document a recent and strong standardization in the structure of executive compensation. This standardization is unexpected since, in principle, the optimal incentive contract is a function of many factors that vary among firms. Executives receive compensation in many different forms, including salaries, bonuses, long-term incentives, stock, stock options, retirement benefits, and various types of perquisites. Based on contract theory, we expect that each company designs its compensation plans using these elements in different proportions. However, even though we observe much heterogeneity in the design of compensation plans, more than 25 percent of the variation across … Read more
Direct listings, the most promising disruptor of IPOs, received a significant boost this week, thanks to the U.S. Securities and Exchange Commission (SEC) ruling on a petition from the Council of Institutional Investors.
Most common in the tech industry, direct listings have been put to the test four times in the last two years. Spotify and Slack paved the early path with their direct listings in 2018 and 2019, respectively. Earlier this year, Palantir and Asana used direct listings as an alternative to the traditional underwritten IPO and have continued to generate an enormous amount of media attention in their … Read more
Corporate purpose is having a moment, as it seems to do each generation or so. The Business Roundtable made waves last year by pivoting away from shareholder centrism in its “redefinition” of corporate purpose. Directors, officers, institutional investors, and others have been buffeted by a new enthusiasm for SRI, Social Impact, and ESG investing. B Lab and a growing cadre of academics, public intellectuals, and legislators have generated interest in bespoke organizations capable of fostering social enterprise. Taken in whole, these developments have fed bold predictions of a generational shift toward prosocial preferences amongst investors and entrepreneurs.
At the center … Read more
In the months following the onset of the COVID-19 pandemic, a slew of parties filed lawsuits in US courts relating to M&A transactions that were signed prior to March 2020 and that buyers were seeking to terminate as a result of the pandemic. In these lawsuits, buyers commonly alleged one (or both) of the following as justification for their failure to close: (i) that the target suffered an MAE as a result of COVID-19’s impact on its business; or (ii) that target materially breached the conduct of business covenant by virtue of its actions (or inactions) in response to COVID-19. … Read more
My article, Corporate Family Matters, proposes a definition of and governance regime for a particular type of corporate group – the family. I define the family as an enterprise formed by weaving corporations, partnerships, and LLCs together into a mix of public and private entities acting for the benefit of a parent corporation or for the personal gain of one or more leaders of the enterprise. A corporation should be treated like a family when: (1) there is more than one entity with shared ownership or management or when an entity is wholly-owned by another entity and (2) that … Read more
On December 11, 2020, Congress passed the National Defense Authorization Act for Fiscal Year 2021, H.R. 6395 (the “NDAA”). The $740.5 billion bill includes language amending the Securities Exchange Act of 1934 (the “Exchange Act”) to provide the SEC with express statutory authority to seek disgorgement in civil enforcement actions pending in federal court. The amendments to the Exchange Act—which also double the statute of limitations for disgorgement from 5 to 10 years—are a direct Congressional response to limitations imposed by the Supreme Court in Liu v. SEC, 140 S. Ct. 1936 (2020) and Kokesh v. SEC, 137 … Read more
Incomplete contract theory recognizes that parties have neither the interest, nor the time, nor the ability to anticipate and address every contingency in contracts. The more complex and time-sensitive the transaction, the more practical constraints force lawyers to limit the scope of drafting and broadly rely on legal defaults and open‑ended terms to plug holes and address contingencies. In theory, this should explain why practitioners broadly choose Delaware as the preferred jurisdiction and forum for merger and acquisition (M&A) transactions and other high‑end corporate deals. Lawyers appear to perceive Delaware as superior to other states both for its default rules … Read more
On Friday night, December 11, 2020, tucked below its order denying Texas’s bid to overturn the results of the Presidential election, the U.S. Supreme Court agreed to review what petitioners Goldman Sachs Group, Inc. and its former top executives (“Goldman”) billed as “the most important securities case to come before the Court since Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (2014) (Halliburton II).” That the Supreme Court granted Goldman’s petition in Goldman Sachs Group Inc. v. Arkansas Teacher Retirement System without a well-developed circuit split suggests that some members of the Court are … Read more
Institutional investors are increasingly playing a major role in the shift toward stakeholder capitalism. They are also facing pressure from their clients and others to focus more on ensuring that their investments promote corporate sustainability. Such expectations are reinforced by leading institutional investors’ commitments – such as those included in BlackRock CEO Larry Fink’s 2020 annual letter – to do well by doing good.
In a recent article, I shed fresh light on the role of leading institutional investors in the transition toward stakeholder capitalism. I show that, while institutional investors may encourage the adoption of sustainability-oriented policies by corporations, … Read more
The SEC has proposed amendments that would permit, for a temporary five-year trial period, companies to offer equity compensation to “platform workers” (gig economy workers who provide services by means of an internet or other technology based marketplace platform) under the same regulatory framework available for offerings to employees (available here). The amendments would expand Rule 701 (by which non-reporting companies may issue equity-based compensation without a registration statement) by adding a new subsection, Rule 701(h), and Form S-8 (by which reporting companies issue equity-based compensation) by adding a new General Instruction A.1.(b), to permit these offerings.
The proposed … Read more
In the United States, President Trump has struggled to decide whether Jay Powell or China’s Chairman Xi is the greater enemy to the U.S. In Turkey, President Erdogan concluded that “interest rates are the mother of all evil,” switched out his central bank governor for refusing to lower interest rates, and reined in the independence of the central bank with the stroke of a pen. In India, Indonesia, Ukraine, and elsewhere, lawmakers are tightening the political grip on monetary authorities. These examples reflect a new reality in monetary policy circles: the political retreat from central bank independence, … Read more
On December 1, the Nasdaq Stock Market asked the Securities and Exchange Commission (SEC) for authority to adopt new listing rules aimed at increasing board gender and racial diversity. If approved, Nasdaq-listed companies will be required to disclose their board diversity data and have, or explain why they don’t have, one female and one underrepresented minority board member. Nasdaq’s The request is the latest milestone on the business and investment community’s journey to transforming corporate culture by uprooting long-established power imbalances.
As I map out in my recent article, “Sex, Power, and Corporate Governance,” the #MeToo movement first prompted key … Read more
Two recent decisions of the Delaware courts confirm that Section 220 of the Delaware General Corporation Law will be consistently interpreted to grant pre-complaint discovery to stockholders seeking to prepare fiduciary-breach litigation.
In Pettry v. Gilead Sciences, Inc., a group of Gilead stockholders sought to inspect corporate documents for the purpose of investigating wrongdoing in the development and marketing of HIV drugs. C.A. No. 2020-0132-KSJM (Del. Ch. Nov. 24, 2020). Gilead opposed the demand, principally on the ground that the stockholders’ basis to suspect such wrongdoing—unproven allegations in other lawsuits—was inadequate to justify inspection. The court disagreed, finding … Read more
Soon after the coronavirus pandemic erupted in the spring, Congress enacted the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, pumping $2.2 trillion into the economy. Now, nine months later, many of that law’s critical elements have ended or will soon expire. Senate Majority Leader McConnell and Speaker of the House Pelosi are engaging in talks but have yet to agree on a new stimulus package. When they do, we believe they can learn several important lessons from the effects of the CARES Act. In our article, we conducted an empirical study of important elements of the CARES … Read more
Sustainability in business and environmental, social, or governance (ESG) factors in finance have entered the mainstream. In 2020, the CEO of Blackrock wrote: “Our investment conviction is that sustainability and climate integrated portfolios can provide better risk-adjusted returns to investors.”
At NYU Stern’s Center for Sustainable Business, we set out to study the state of the research on the topic and surveyed 1,141 primary peer-reviewed papers and 27 meta-reviews (based on ~1,400 underlying studies) published between 2015 and 2020. Recent interest is enormous: The research output over the last five years matches the number of articles published prior to 2015.… Read more
What do the emergence of independent directors in South Korea, the legal reforms on related-party transactions in India, the continued rise of environmental, social, and governance (ESG) factors in the United States, and the global spread of corporate governance codes have in common? They all trace back to efforts by international organizations – the International Monetary Fund (IMF), the World Bank, the United Nations, and the Organisation for Economic Cooperation and Development (OECD), respectively – to shape corporate governance around the world. The different corporate guidelines and norms produced by international organizations have had a noticeable impact on legal changes … Read more
Sustainability issues are increasingly high on the list of competition policy priorities both at the European Union and member state levels. The European Commission (EC) and national competition authorities are actively rethinking how competition policy can better support the transition to sustainable economic growth. Whilst recent initiatives are setting the path to much-needed guidance and legal certainty, there are already lessons businesses can take away from the discussions to date.
- Industry initiatives to tackle sustainability objectives can breach competition rules and should therefore be approached with the same eye to competition law compliance as any other collaboration with competitors. The
… Read more
The Dodd-Frank Act of 2010 allows the Securities and Exchange Commission (SEC) to bring enforcement actions and impose civil penalties in administrative proceedings as alternatives to federal district courts. Some argue that this gives the SEC a “home-court” advantage. For example, the SEC serves as both prosecutor and, through the administrative judges it appoints, adjudicator in an administrative proceeding, and no jury trials are allowed. The SEC argues, though, that administrative proceedings can process cases more efficiently than federal courts. Yet the opacity of administrative proceedings and the SEC’s discretion over the choice of venue have prompted criticism and challenges … Read more
On September 28, 2020, the UK government made the Intellectual Property (Amendment etc.) (EU Exit) Regulations 2020 (IP Regulations 2020), which amend the intellectual property (IP) regime in the UK to reflect Brexit-related changes once the transition period ends. The IP Regulations 2020 overlap somewhat complexly with existing UK and EU IP rights. In particular, exhaustion of rights principles seem to have fallen into a lacuna and as a result parallel importation from the UK into the EU may be significantly impacted. Owners of existing registered IP rights and pending IP applications under EU law should carefully consider the … Read more
In a 1987 paper, available here, we argued that non-investor stakeholders play an important role in influencing financial policy and corporate valuation. We also distinguished explicit claims between a company and its counterparties from what we called implicit claims. In more recent years, there has been a growing focus on non-investor stakeholders and environmental, social, and governance (ESG) and, in particular, their role in creating corporate value. Left largely unexplained, though, is how this occurs. Here we argue that one of the keys is the distinction between explicit and implicit claims.
Explicit claims are familiar contracts. These include employment … Read more
With COVID-19 cases rising rapidly around the world, Pfizer’s announcement on November 9, 2020, that its coronavirus vaccine was highly effective in early trials offered a rare bright spot for the coming winter. But the news was soon dampened by word that the company’s CEO, Albert Bourla, sold some 60 percent of his Pfizer shares on the day of the announcement. According to Pfizer, Bourla’s sales occurred under a preset arrangement known as a 10b5-1 plan – so named for an obscure SEC rule designed to shield executives from spurious insider-trading accusations. The rule gives an affirmative defense … Read more
On October 29, 2020, The New York State Department of Financial Services (“DFS”) published an industry letter (the “Industry Letter”) for banks and other financial institutions that it regulates that details the range of climate change risks that could soon impact these institutions. The letter is addressed to both DFS-regulated banking institutions and non-bank institutions, such as money transmitters and virtual currency companies. The letter sets forth DFS’s expectations that banking institutions begin to address the financial risks from climate change in their risk management processes, governance frameworks and business strategies, including by designating a board member or committee … Read more
In our recent paper, Can Governance Help in Making an IPO “Successful”? New Evidence from Europe, we find that corporate governance affects company performance after an IPO in different ways. We consider an IPO to be successful if it combines positive performance in the short-term, with a value creation effect, and also in the medium-long-term, with a value protection effect (Bertoni et al., 2014).
As to the short-term, we consider the performance of a company at the date of the IPO, as measured by Q-Tobin, which is calculated as the ratio of the market capitalization of the firm … Read more
Many high-profile transactions impacted by the COVID-19 pandemic have fallen apart between signing and closing, resulting in litigation – often in the Delaware Court of Chancery – focused on whether the buyer had an obligation to close. Buyers backing out of transactions generally have asserted the occurrence of a “material adverse change” or “material adverse event” (“MAE”) and the failure of the to-be-acquired company to operate in the ordinary course of business. Sellers generally have disputed that COVID-19 caused the failure of closing conditions, and have sued for specific performance of buyers’ obligations to close or damages. As these cases … Read more
In a series of papers over the past decade, the three of us have studied extensively the persistence of obsolete terms in sovereign debt contracting. (e.g., here, here and here). Our interest was motivated by a puzzling observation: Transactional lawyers did not appear to reform their contract clauses promptly in response to changes in the external environment. In a market with multi-billion dollar transactions, and with some of the most elite law firms in the world, the slow pace of innovation was surprising. It was especially surprising given the conventional view that good transactional lawyers keep abreast of … Read more
On Wednesday, November 18, 2020, the staff of the Division of Corporation Finance (the “Division”) of the Securities and Exchange Commission (“SEC” or the “Commission”) took another step forward for crypto regulation by granting a no-action letter to IMVU, Inc. (“IMVU”), a software development company that offers virtual world platforms, to sell its Ethereum-based token, VCOIN. The relief provides that the Division will not recommend enforcement action to the Commission if IMVU offers and sells VCOIN, which is transferable both on and off of IMVU’s platform, without registration under Section 5 of the Securities Act of 1933 (the “Securities Act”) … Read more
Historically, how a corporation invests and pursues its goals has been recognized as within the discretion of the board of directors. The business judgment rule insulates directors from liability for exercising that discretion by restricting second-guessing from shareholders absent a showing of fraud, illegality, or self-dealing. In other words, a business decision that doesn’t turn out well shouldn’t be questioned as long as the directors acted in good faith.
In recent years, though, the business judgment rule seems to have been eroded by forces from both the political right and the political left. Those leaning right assert that the obligation … Read more
Republican and Democratic leaders have both called for greater scrutiny of the power and influence of Big Tech firms, but, unsurprisingly, they have disagreed about how to address the problem. Senator Elizabeth Warren and many other leading Democrats have called for breaking up Google, Amazon, and Facebook in a revival of the trust-busting progressive era of the early 20th century. In contrast, the Trump administration has triggered traditional monopoly review of a number of leading technology firms, which is likely to lead only to financial sanctions or more modest remedies.
In a recent article, I argue that politicians’ concerns … Read more
The SEC Division of Corporation Finance has provided its views regarding certain disclosure considerations for companies based in or with the majority of their operations in the People’s Republic of China.
The US Securities and Exchange Commission (SEC) recognizes the increased exposure of US investors to companies based in or with the majority of their operations in the People’s Republic of China (China-based Issuers) and the SEC’s limited ability to promote and enforce high-quality disclosure standards for China-based Issuers. The Division of Corporation Finance (Corp Fin) published CF Disclosure Guidance: Topic No. 10, Disclosure Considerations for China-Based Issuers (Guidance), on … Read more
This is the gossip season, and almost everyone has heard a rumor about who will be the next chair of the SEC. Although I was interviewed by the Biden transition team (for my views, not as a candidate), my sources are no better than those of others. Nonetheless, they all tell me that the next chair will be Gary Gensler, the former chair of the Commodity Futures Trading Commission and current chair of the Transition Taskforce for Financial Regulation for President-elect Biden. In my view, he is probably the optimal choice — experienced, tough at enforcement, and well versed in … Read more
With the prospect of global vaccines on the horizon, companies worldwide continue to address the challenges of pandemic management and recovery on their businesses, the communities and constituencies they serve and especially on their employees. As companies seek to prioritize workplace and customer health and safety alongside productivity and the achievement of strategic plans, the psychological, as well as physical, well-being of employees has been brought into sharper focus this year. The urgent need to address issues of diversity, inclusion, racism and racial injustice, gender equality, and attendant financial and socioeconomic inequities has heightened attention to workplace wellness, as have … Read more
The COVID-19 outbreak provides fertile ground for sweeping regulatory changes. On May 19, 2020, for example, President Trump issued “Regulatory Relief to Support Economic Recovery Executive Order 13924”, which prompted the U.S. Securities and Exchange Commission (“SEC”) and Department of Labor (“DOL”) to promulgate new rules to protect investors and facilitate capital formation. The SEC adopted amendments aimed at harmonizing and improving the “patchwork” exempt offering framework, while the DOL announced that 401(k) plan fiduciaries have the ability to invest in private equity funds.
The primary purpose of these changes is to democratize and equalize access to … Read more
President-elect Biden has signaled that robust consumer protections will be a major focus of his policy agenda in what is anticipated to be a dramatic shift from the deregulatory policies of the Trump administration. In this article, we preview the incoming administration’s anticipated consumer protection agenda in two areas: data privacy and consumer financial protection. We also consider what, if any, impact this policy shift is likely to have on state-level enforcement.
Assuming that Republicans retain control of the Senate, and with a divided Congress consumed at least in the short term with negotiations over COVID-19 relief, we expect to … Read more
The Office of Financial Research (“OFR”) was created by the Dodd-Frank Act to help address the gaps in data availability and analysis that had hampered governmental authorities in their response to the financial crisis of 2008. It was hoped that the OFR would serve as an “early warning system” that would detect emerging systemic risks through data collection and analysis, but the OFR never really had the opportunity to live up to its promise. During the Obama administration, it suffered from an unsupportive Treasury Department and pushback from other federal financial regulatory agencies; under the Trump administration, the staff and … Read more
On November 11, 2020, the Parliament of the United Kingdom (“U.K.”) introduced the National Security and Investment Bill of 2020 (the “NSI Bill”) to modernize the U.K.’s foreign direct investment (“FDI”) screening process and strengthen its ability to investigate and intervene in transactions targeting U.K. businesses. The NSI Bill imposes mandatory notification requirements to the U.K. Department of Business, Energy and Industrial Strategy (“BEIS”) for transactions involving investments in U.K. businesses operating in certain strategic sectors, a regime that will apply to investors from any foreign country.
In the broader context, the NSI Bill is reflective of a global trend … Read more
The hype over technology-enabled disintermediation of financial services, commonly known as fintech, seems at a peak. Though fintech firms promise to increase competition in the financial industry, it is unclear how much the various forms of fintech, including those working on the blockchain, will disrupt the current competitive environment.
In our paper, we review the market failures justifying financial intermediation. We find that fintech has the potential to improve the efficiency of financial intermediation in, for instance, the area of payments and financial advice. However, the current hype may be exaggerated and partly misleading. We contend that trust, a … Read more
In August 2019, the Business Roundtable released a statement redefining the purpose of a corporation to maximize value “for the benefit of all stakeholders – customers, employees, suppliers, communities, and shareholders.” The statement was signed by 181 CEOs, including Jamie Dimon, chairman and CEO of JPMorgan Chase and chairman of the Business Roundtable, and came after several years of political pressure on behalf of stakeholder objectives, including by U.S. Senator Elizabeth Warren. In 2018, Warren introduced the Accountable Capitalism Act, which would require that directors of large corporations consider the interests of all stakeholders and that at least 40 percent … Read more
The market for cryptoassets is burgeoning, as distributed ledger technology transforms capital and financial markets. With the extraordinary growth in the crypto-markets comes the need for regulation to promote efficiency, capital formation, and innovation while protecting investors. With the need for regulation comes enforcement.
In a new article, Crypto-Enforcement Around the World, we elaborate on these issues and report on the results of an international enforcement survey conducted by our Blockchain and Fintech Research Program. Our analysis also builds on the results of the research by one of the co-authors, Prof. Guseva, in her article, The SEC, Cryptoassets, and … Read more
In an important decision for arbitration users, the U.K. Supreme Court has clarified how English law will determine the governing law of an arbitration agreement which provides for an English seat in the absence of an express choice of law. In its 9 October 2020 decision in Enka Insaat Ve Sanayi AS v OOO “Insurance Company Chubb” & Ors  UKSC 38, the Supreme Court reaches the same outcome as the Court of Appeal, while employing slightly different reasoning.
The Enka case arises from a typical trap for the unwary. When drafting arbitration agreements, practitioners are well advised to provide … Read more
My article, Enforcement Against the Biggest Banks, takes a census of the hundreds of enforcement actions by American regulators against the world’s largest banks between the passage of Dodd-Frank in July 2010 and December 31, 2016, near the end of the Obama administration. The effort allows us to characterize the nature of contemporary American bank enforcement.
Enforcement against big banks can be “cumulative” – increasingly, multiple agencies penalize banks for the same misconduct. One regulator might view the misconduct as, say, a violation of public disclosure duties, but another regulator might see it as a problem with the safety … Read more
On October 30, 2020, the US Department of Labor (DOL) published Financial Factors in Selecting Plan Investments (the Rule) and a related Fact Sheet, a codification of the spirit, if not the exact words, of a controversial proposal issued by the DOL in June 2020 (the Proposal). The Rule adopts amendments to certain provisions of the “investment duties” regulation under Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA), and requires fiduciaries of pension plans (and other benefit plans covered by ERISA) to choose investments “based solely on pecuniary factors” relevant to a particular … Read more
Corporate social responsibility (CSR) is typically assumed to be a voluntary rather than mandatory initiative. Yet, over the past few decades, a growing number of countries have adopted laws that explicitly require corporations to undertake CSR.
To date, most scholarly and policy attention has focused on laws that require companies to disclose extensive information about their social and environmental plans, actions, or performance. In recent years, though, a growing number of countries have gone beyond disclosure to require CSR due diligence, corporate philanthropy, certain governance structures, and making CSR a duty under corporate law.
Mandatory CSR Due Diligence
CSR is … Read more
In the weeks leading up to Ant Financial’s ill-fated IPO, Jack Ma criticized the system of international banking regulation in remarks at the Bund Summit in Shanghai. The Alibaba co-founder contended that the current framework was a poor match for countries like China that needed to innovate in the creation and delivery of financial services. Describing today’s regulatory system as designed for the “elderly” economies that have long relied on a traditional and compliance-heavy system of banking, Ma explained that emerging or “youth” nations depended on their ability to foster innovation in ways that were less constrained by capital-intensive rulemaking.… Read more
On July 31, 2020, Judge Caproni in the Southern District of New York denied an emergency motion filed by certain bondholders for a temporary restraining order that would have halted efforts by the Republic of Ecuador (“Ecuador”) to restructure $17.4 billion of its sovereign debt based on allegations of securities fraud arising from statements made by Ecuador in its restructuring-related press releases. The Court upheld Ecuador’s use of the collective action clauses (“CACs”) in its indentures as the primary tool to accomplish the proposed restructuring.
In addition to its effects on Ecuador, which is restructuring its debt amidst a severe … Read more
The forced postponement of Ant Group’s initial public offering (IPO), the largest ever, by the Chinese government is the latest example of the heavy-handed regulatory approach that has made it extremely costly for companies to go public in China. The high opportunity cost of going public on the Shenzhen or Shanghai stock exchanges, where the initial return from the offer price to the first unconstrained market price has averaged 170 percent during 1992-2018, has encouraged many Chinese companies to go public in Hong Kong, the U.S., or elsewhere. The high initial returns have resulted in massive oversubscriptions of almost all … Read more
Business history and theory reflect a tension between public and private conceptions of the corporation. This tension and conceptual ambiguity lay close to the surface of The Modern Corporation and Private Property, in which Berle and Means portrayed the modern public corporation as straddling the public/private divide. It is also embodied in the famous Berle-Dodd debate, which provides the basis for contemporary clashes between “different visions of corporatism,” such as the conflict between shareholder primacy and stakeholder-centered versions of the corporation.
In my recent paper, “Corporations, Directors’ Duties and the Public/Private Divide,” I examine a number of … Read more
A lot of attention has been paid to board diversity – or lack thereof – in recent months. California enacted AB-979, which expanded upon California’s earlier gender diversity law and requires boards to make strides in other types of diversity, including racial and ethnic minorities. The law requires every public company with securities listed on a major U.S. stock exchange and that has its principal executive office in California, as listed on its form 10-K annual report, to have at least one director from an underrepresented community on its board by the end of the 2021 calendar year and upwards … Read more
The European Commission retained Ernst & Young (“EY”) to undertake a detailed study of “short-termism” and, implicitly, to report whether it was a major roadblock to more sustainable corporate governance. Their study was then presented at a three day international conference at Oxford on November 11-13. Professor Mark Roe of Harvard Law School and I were asked to make presentations. Professor Roe’s statement ran last week on this blog, here, and a summary of my statement appears below.
In a nutshell, the EY “Study on directors’ duties and sustainable corporate governance” for the European Commission describes a … Read more
On October 23, 2020, the International Swaps and Derivatives Association, Inc. (ISDA) published its IBOR Fallbacks Protocol (Protocol) and Supplement to the 2006 ISDA Definitions (Supplement) in anticipation of the expected discontinuation of the London Interbank Offered Rate (LIBOR) at the end of 2021. ISDA has also published a related set of Frequently Asked Questions, as well as a User Guide to IBOR Fallbacks and RFRs, to assist market participants in navigating the Protocol and the Supplement.
ISDA collaborated with the Financial Stability Board’s Official Sector Steering Group to devise more robust fallbacks for LIBOR and other key … Read more
The prominence of corporate social responsibility (CSR) has been growing in recent years, but the empirical relationship between CSR and firm value is still inconclusive. Though many studies show a positive impact of CSR on firm value, others provide evidence to the contrary. This relationship may be unclear because of the lack of understanding about the mechanisms through which CSR may affect firm value. In a new paper, we investigate whether CSR affects firm value by improving perceived product quality (brand value) and differentiating among products. More specifically, we investigate whether CSR activities, especially those visible to customers such as … Read more
The European Union has recently taken a significant step in regulating foreign direct investment (“FDI”). As of October 11, 2020 a new EU regulation related to inbound foreign investment (the “FDI Regulation”) became binding on all 27 Member States. The new FDI Regulation does not create a stand-alone mechanism to vet foreign investment akin to the Committee on Foreign Investment in the United States (“CFIUS”) or national security review systems established by individual Member States. Rather, the new EU FDI regime establishes minimum standards for Member States’ review systems, creates an information sharing channel between the EU … Read more
Since the beginning of 2020, COVID-19 has prompted a surge in economic uncertainty, causing interruptions in business supply chains and revenues that now threaten the survival of companies. Companies struggling to meet their fixed expenses and existing obligations respond by increasing the demand for loans, but banks are inclined to reduce the supply. In our new paper “Bank Lending during the COVID-19 Pandemic,” we examine how the COVID-19 crisis affects the pricing and structure of large corporate loans in the global syndicated loan market.
Overall we consider more than 4,000 loans granted from 77 banks to 820 firms in 28 … Read more
With ballots still being counted in many races, and threats of litigation in others, the 2020 election season may not be fully complete. Voters in red states and blue states displayed unity on few issues, but among these cannabis ranks high: New Jersey, Arizona, Montana and South Dakota voted to legalize recreational cannabis, and Mississippi and South Dakota voted to legalize use of medical marijuana. Oregon also became the first state to decriminalize small amounts of cocaine, heroin, methamphetamine and other drugs.1
These state-level actions will pose additional compliance challenges for financial institutions that already struggle with the conflict posed … Read more
While much attention has been paid to President Trump’s deregulatory efforts and intentions, presidential involvement in the work of the administrative agencies is not new. Past presidents including Ronald Reagan, Bill Clinton, and Barack Obama have acted up to – and at – the limits of presidential power in efforts to ratchet-up, or ratchet-down, regulation.
My recently published article, Presidential Pendulums in Finance, examines the past decade of presidential involvement in financial regulation in particular. As the paper explains, presidential involvement in financial regulation over the past 10 years stands to quicken the rate at which regulatory cycles … Read more
In recent years, there has been a debate in the corporate world about the capabilities and incentives of institutional investors to invest in corporate stewardship – defined as monitoring, voting, and engagement – of their portfolio companies. The main focus has been on mutual funds, which hold most of the assets of institutional investors.
According to conventional wisdom, which finds support in theoretical and empirical studies, institutional investors are not active stewards for four reasons. First, managers of mutual funds have poor incentives to invest in active stewardship because of their compensation structure – a tiny fixed percentage of assets … Read more
The European Commission’s Sustainable Finance Action Plan (the “Action Plan”) proposed a package of measures including, amongst other initiatives, a regulation imposing sustainability-related disclosures on financial market participants (“SFDR”) and a regulation to establish an EU-wide common language (or taxonomy) to identify the extent to which economic activities can be considered sustainable (the “Taxonomy Regulation”). This briefing note provides an overview of the Taxonomy Regulation and the SFDR and discusses their impact on private fund managers, including non-EU managers who market their funds into the EU and/or the United … Read more
In July 2020, the European Commission published the “Study on directors’ duties and sustainable corporate governance” by EY. The report purports to find evidence of debilitating short-termism in EU corporate governance and recommends many changes to support sustainable corporate governance. In a recent paper, we point out deep flaws in the report’s evidence and analysis.
Here’s a brief summary of those flaws. First, the report defines the corporate governance problem as pernicious short-termism that damages the environment, the climate, and stakeholders. But the report mistakenly conflates time-horizon problems with externalities and distributional concerns. Cures for one are not … Read more
Investors have historically overlooked social factors amid a focus on the environmental and governance counterparts as they assess the merit of an investment. This may have been due in part to the difficulty in quantifying social concerns as drivers of shareholder return as well as a lack of available data. However, recent trends demonstrate that the “S” in environmental, social and governance factors (ESG) is now an equally important consideration for companies and their shareholders.
In this article, we look at ESG matters in the employment context. An increased focus on social factors — such as diversity, working conditions and … Read more
Corporate governing boards have a substantial homework assignment given multiple important developments affecting board composition and oversight of workforce culture. These developments encompass new surveys from prominent governance and consulting sources, notable litigation trends, and a new state law. Collectively, they represent an accelerated focus by third parties on how directors are selected and employees are retained.
A significant new report from The Conference Board highlights important governance trends relating to board composition and diversity, the profile and skills of directors, and policies on their election, removal, and retirement. The report is based upon a close review of … Read more
Columbia Law School has launched a six-episode podcast series called Beyond “Unprecedented”: The Post-Pandemic Economy, hosted by Eric Talley, the Isidor and Seville Sulzbacher Professor of Law. In each episode, he and other experts at the law school explore the challenges facing small businesses, essential workers, corporate boards, and financial institutions in the aftermath of the Covid-19 pandemic. Talley and his guests also discuss the solutions that they believe are necessary to get beyond these “unprecedented” times.
The first five episodes are:
Essential—and Broke (wealth and income inequality), with Katharina Pistor, Edwin B. Parker Professor of Comparative Law, … Read more
In a new paper, I examine the legal issues surrounding a “retail” central bank digital currency (“CBDC”), one that is used by consumers on a day-to-day basis as an alternative to cash. Most discussions about CBDC focus on its purported benefits and initial design. Little is written about how existing laws and regulations will extend to CBDCs or what new regulations will have to be implemented. My paper engages in that analysis.
The analysis assumes that future retail CBDCs will be account-based, meaning the currency will be represented by book entries in accounts that are held and managed by banks. … Read more
As the last few years have shown, shareholder derivative litigation — claims brought by a shareholder purportedly on behalf of a company against its board of directors or senior management for alleged breaches of fiduciary duty — is often brought following the public disclosure of a negative event (so-called “event-driven litigation”). When multiple companies reported the departure of executives in the wake of #MeToo allegations, their boards faced shareholder derivative suits related to the adequacy of the company’s sexual harassment policies or board-level monitoring. Often, litigation also follows when companies disclose data breaches, with claims that the boards of those … Read more
This past summer, the Securities and Exchange Commission (SEC) proposed eliminating quarterly disclosures for 90 percent of institutional investment managers by raising the reporting threshold under Section 13F of the Exchange Act from $100 million to $3.5 billion. The proposal generated widespread opposition. One key criticism — advanced on this blog, in various media outlets, and by many of those who submitted comments to the agency — was that the agency’s proposal would bolster hedge fund activism by allowing many activists to “go dark,” build up positions in companies in secret, and then “ambush” unsuspecting managers.
Although … Read more
The last few years have seen a marked worldwide expansion in “ESG”-labelled investment products, bringing sustainable finance into the spotlight as a clear financial industry megatrend. By 2018, investment in sustainable assets in five of the world’s major markets (Europe, the United States, Japan, Canada and Australia-New Zealand) stood at $30.7 trillion, a 34% increase over the previous two years, and it was estimated that over 80% of institutional investors had an ESG component as part of their investment strategies.
And the trend is only accelerating: capital flows into funds incorporating sustainability and ESG-driven strategies hit an all-time … Read more
As I’ve Zoom-traveled the country speaking about legal issues involving the election, I have found myself, as well as audiences, bewildered and frustrated by one underlying question: Why is there so much legal uncertainty about so many critical questions concerning the rules for resolving a disputed presidential election?
If ever a need existed for clear legal rules established in advance, before we know whose ox will be (Al) Gored, that situation is it.
Let me provide just one critical example. The Constitution does not create rules or an institutional structure for resolving a modern, disputed presidential election. It provides … Read more
[The following remarks, delivered on October 29, 2020, opened the first session of the three-part Conference on Racial Equality in Corporate Governance co-sponsored by the Ira M. Millstein Center for Global Markets and Corporate Ownership at Columbia Law School.]
I am honored to kick off this important series of discussions about what corporate governance and corporate America can do to reduce racial inequality and, more specifically, to help black people finally achieve equality after 400 years of systemic racism.
My only regret about this series is that it did not happen long ago. For most of the period since 1980, … Read more
Pre-COVID-19, pressure from investors, stakeholders and regulators helped jump-start green financing. The onset of the pandemic brought a temporary chilling effect to the global economy, but because sustainability-linked loans (SLLs) were developed to fill a critical gap in financial markets, they are likely here to stay and to continue growing in popularity, even as COVID-19 remains a public health crisis. Quarterly reports and trends — determined by analyzing Bloomberg Terminal data from 2018 through the second quarter of 2020 — indicate a long-term appetite for SLLs, with investors, stakeholders and regulators demanding sustainability now more than ever. Indeed, in evaluating … Read more
The persistent gender gap in corporate leadership has led several European countries to institute board-related policies such as gender quotas, starting with Norway in 2003. Recently, California became the first U.S. state to follow suit, with many more considering similar regulatory measures. Despite this, the World Economic Forum estimates that the gender gap in wages and leadership would not be bridged in the next two centuries at its current pace. It is hard to overstate the need to understand what company-level factors affect the gender pay gap. Moreover, given the public interest in reducing the gender imbalances at all levels, … Read more
Changes in the global climate are having profound impacts on business operations, governance, and organizational management around the world. Boards of directors are searching for ways to account for these changes as they help guide their organizations, and investors are increasingly concerned about how these changes might impact their portfolios. According to some, climate change is “on the top of investors’ 2020 sustainability agendas for engaging with boards of the companies they invest in.” A key component of this competency, likely to be a significant question of corporate governance in the coming years, is climate risk management. Companies, investors, … Read more
In 1979, police in Pensacola, Florida, arrested Ku Klux Klan member B.W. Robinson for covering his face at a rally. He pleaded no contest so he could appeal his conviction to the Florida Supreme Court. Once there, Robinson challenged the constitutionality of Florida’s anti-mask statute. He insisted it deprived him of due process and infringed upon his First Amendment rights. The Florida Supreme Court reversed Robinson’s conviction, ruling that the law was constitutionally overbroad because it was “susceptible of application to entirely innocent activities.”
Wait a second. Are we saying that not too long ago, an ultra-conservative Floridian took … Read more
Corporate governance is historically perceived as a specialized, idiosyncratic and somewhat arcane field. But increasingly, it has come to serve as a lightning rod for broader public debates. Perhaps no moment underscores this trend more sharply than the 2020 calendar year: Not only did the world face twin crises of unprecedented global pandemic and an invigorated public debate about racial equity and inclusion, but those events accelerated nothing short of a seismic shift in how we think about corporate governance.
And no one does seismic shifts like California: In September of this year, Gov. Gavin Newsom signed into … Read more
In a new essay, available here, I discuss the essential but insufficient role of regulation to promote more effective stewardship by institutional investors. My essay offers a frame for specific policy recommendations that align the responsibilities of institutional investors with the best interests of their human investors in sustainable wealth creation, environmental responsibility, the respectful treatment of stakeholders, and, in particular, the fair pay and treatment of workers. In doing so, the essay: 1) explains how the corporate governance system we now have is fundamentally different from the system we had when the regulatory structures governing institutional investors were … Read more
ESG reporting is now recognized as a significant agenda item in the ESG space. The plethora of different reporting standards has caused concern and confusion, as those responsible for providing disclosure, as well as the intended beneficiaries of the disclosure, seek to navigate the evolving disclosure landscape. Building upon our recent client alert that provided an overview of ESG disclosure frameworks and standards, available here, we report on two recent initiatives to unify some of the competing standards:
- In September, five leading standard setters for ESG reporting, including the Global Reporting Initiative (“GRI”), the Climate Disclosure Standards Board (“CDSB”),
… Read more
Business persons and lawyers have long debated whether a business corporation does or should have a purpose other than advancing shareholder interests. In a democratic, pluralist society, the issue of corporate purpose remains important and will not (and should not) go away. However adamantly divergent descriptive and prescriptive positions are held, it is healthy that, periodically at least, the debate is revisited and disagreements aired. Neither corporate law nor business practice demands an unequivocal or uniform resolution. Different businesses will continue to answer the corporate purpose question differently.
Early American business corporations were expected to advance a public-serving purpose. … Read more
Special purpose acquisition companies (SPACs) are increasingly being used as an alternate vehicle to traditional initial public offerings. Companies that go public through a traditional IPO process are often subject to shareholder securities class actions. Inevitably, securities class actions will be filed against companies that become publicly traded and file public reports with the U.S. Securities and Exchange Commission as a result of a merger with a SPAC.
One often-referenced advantage of the SPAC process as compared to a traditional IPO is the ability to directly communicate financial projections to the market. Such projections may become a greater area of … Read more
One of the many significant reforms enacted in The Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 was the creation of a whistleblower bounty program within the SEC. The program increased monetary rewards for whistleblowing and provided protections from retaliation with the goal of encouraging more whistleblowers to report their information to the SEC. While there is a growing literature investigating the effects of many facets of Dodd-Frank, an unanswered question is whether the whistleblower program affected illegal insider trading – an activity that is traditionally hard for the SEC to detect and prosecute. In my recent paper, … Read more
In this article, we follow up on our overview of going private transactions (available here) by focusing on an important but often overlooked workstream in these deals. Companies are frequently privatized by a group of significant shareholders, outside investors and sometimes members of senior management, and in these “club” or “consortium” deals, the buyer group members must negotiate their rights in the privatized target company against the backdrop of the complicated take-private process. Below, we address key considerations for these negotiations, including the interplay of this process with the going private process and documentation.
A Private Company Investment
Members … Read more
Bank bailouts during periodic financial crises aim to stop financial panic and restore the stability of the financial system. Even if they are undesirable, future bank bailouts are unavoidable due to political and political economy reasons, whether or not they are regulated or economically efficient. In a new book, I build on existing literature to examine the different bank bailout and resolution techniques and tools through carefully selected case studies from the U.S., the E.U., the U.K., Spain, and Hungary. The pros and cons of the different legal and regulatory options are identified in order to reconstruct a regulatory framework … Read more
On October 15, the SEC announced a settlement stemming from a company’s series of stock buybacks undertaken pursuant to a Rule 10b5-1 plan. Although the SEC concluded that the company initiated the 10b5-1 plan at a time when it possessed material nonpublic information (MNPI), the SEC did not charge the company or its executives with fraud or insider trading. Instead, the SEC zeroed in on the company’s accounting controls, and found them inadequate to ensure compliance with the board of directors’ stock buyback authorization, which required the company to execute buybacks in accordance with its insider-trading policy.
The novel theory … Read more
Defined-benefit pension plans and deferred compensation are often sizable and important components of CEO pay packages. In recent years, though, they have prompted controversy among investors, policymakers, and academics. On the one hand, CEO pension and deferred compensation are unsecured and typically underfunded obligations, and, like debt (they are often known as inside debt) exposing managers to the same default risks and insolvency treatment as outside do debtholders, and can help strengthen the alignment of executive and debtholder incentives. Consistent with this view, prior studies find that firms that pay CEOs a higher level of debt-like compensation incur lower … Read more
The London Interbank Offered Rate (LIBOR) has been the standard floating rate benchmark for debt instruments of all kinds around the world for decades. It is calculated every banking day by polling major banks on their estimated borrowing costs for various currencies and tenors. If your business carries debt, the interest rate on that debt is likely to be linked to LIBOR. A few years ago, after it came to light that certain banks were effectively manipulating LIBOR, it was announced that LIBOR will cease to be quoted as of the end of 2021.
While the official end of LIBOR … Read more
In 2012, Mary L. Schapiro, the chairwoman of the Securities and Exchange Commission, argued that market participants had “short memories” and that the SEC as a result had to take regular enforcement actions “so that people don’t forget that they have [regulatory] obligations and that somebody is watching and […] willing to hold them accountable.”
Schapiro’s claim has intuitive appeal: If the capital markets regulator does not enforce its rules with some regularity, potential wrongdoers may interpret the resulting inactivity as a reduced risk of apprehension and commit more wrongdoing. In our recently published paper “Short Memories? The Impact of … Read more
On October 7, 2020, the US Securities and Exchange Commission (SEC) issued a Notice of Proposed Exemptive Order Granting Conditional Exemption from the Broker Registration Requirements of Section 15(a) of the Securities Exchange Act of 1934 for Certain Activities of Finders (the Proposal). The Proposal was issued in response to a recommendation by the SEC’s Division of Trading and Markets. It aims to establish, for the first time, a framework for permissible non-registered finder activity, which until this point has been addressed by a “patchwork of staff guidance and no-action letters.” If adopted, the Proposal would establish a non-exclusive … Read more
In the summer of 2020, with the U.S. economy bearing the impact of the COVID-19 pandemic, the unemployment rate was as high as it had been any time since 1948, and the NASDAQ and the S&P 500 indices reached their highest values ever. This dramatic difference in trajectories between unemployment and the stock market raises the questions of how much the stock market reflects the health of the American economy and whether in recent years it does so less than it used to. In a new paper, we explore these issues for the period 1950-2019 for a subset of our … Read more
Even before the emergence of the COVID-19 pandemic, shareholder activism had become a mainstay of public company life in the real estate investment trust world. But in the wake of the pandemic, which upended business as usual in a number of Real Estate Investment Trust (REIT) sectors, we expect shareholder activism to accelerate as the dust settles.
Below are some key trends that we believe will begin to play out as hesitation gives way to opportunism. Companies should thoughtfully assess how they intend to navigate the coming resurgence.
Demonstrating Real Estate Bona Fides
In light of recent market dislocation, the … Read more
There is often a significant delay between the start of an activity that ends up being regulated and the moment a regulatory response is announced or adopted. This regulatory lag (RegLag) enables individuals, firms, and regulators to engage in undesirable activities while the process of regulation moves slowly along. But reducing RegLag, especially in connection with the financial industry – an issue on which we focus – is challenging.
World-wide, regulators are for various reasons hamstrung in defining “wrongs” and identifying activities that should be regulated. Similarly, regulator reaction is also impeded by issues such as confusion about the optimal … Read more
This Client Alert provides an update on shareholder activism activity involving NYSE- and Nasdaq-listed companies with equity market capitalizations in excess of $1 billion and below $100 billion (as of the close of trading on June 30, 2020) during the first half of 2020. As the markets weathered the dislocation caused by the novel coronavirus (COVID-19) pandemic, shareholder activist activity decreased dramatically. Relative to the first half of 2019, the number of public activist actions declined from 51 to 28, the number of activist investors taking actions declined from 33 to 10 and the number of companies targeted by such … Read more
The widespread economic uncertainty caused by COVID-19 poses distinct challenges for buyers and sellers seeking to identify M&A opportunities, as companies evaluate the impact of the pandemic on their businesses to date, and seek to predict its future impact. Continued volatility in the financial markets and the lack of visibility into how the pandemic will affect the global economy in the near or longer term, as well as the pace and scope of economic recovery, introduce elements of conjecture into the valuation process. Securing financing for a transaction is also likely to be difficult, as traditional credit providers may be … Read more
On October 8, 2020, in In re BofI Securities Litigation, the United States Court of Appeals for the Ninth Circuit reversed the district court’s finding that the plaintiffs had not adequately alleged loss causation when claiming that BofI Holding portrayed its banking company as a safer investment than it actually was. These claims originated in two places: a whistleblower lawsuit and blog posts published by a pseudonymous short seller. The court reversed the district court on the first, holding that a whistleblower lawsuit could serve as a corrective disclosure even though it merely alleged that fraud had occurred.
More … Read more
For the last several months, Arnold & Porter has been tracking the Department of Justice’s announcements of fraud cases involving the alleged misappropriation of funds provided by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). So far, DOJ has launched more than 50 such criminal prosecutions for fraudulently seeking or obtaining Paycheck Protection Program (PPP) loans and other funds that Congress appropriated to help Americans cope with the pandemic and related economic challenges. Arnold & Porter’s fraud tracker collects these cases in one place and enables users to see how and where DOJ has been pursuing CARES … Read more