An important debate has emerged in the United States about how business should encapsulate more fully the sustainability-conscious management paradigm. At issue is the proper role of business in society, and the trend is to consider more than just shareholder profits. In the United States, companies like Amazon and Alphabet are incorporating sustainability practices and corporate social responsibility (CSR) into their business models. However, the traditional corporate management paradigm – shareholder primacy – requires corporate boards of directors to place shareholder interests, principally shareholder profits, above all else in corporate decision-making. This model conflicts with the increasingly common sustainability management … Read more
What are cryptocurrencies: securities, commodities, or another form of established currency – a non-sovereign fiat currency? In my forthcoming article, “Cryptocommunity Currencies,” I argue that, like other self-governing bodies, communities that issue cryptocurrencies should be judged on how well they support their currencies, an approach very similar to how we have evaluated traditional sovereign issuers of currency. Indeed, as traditional-sovereign-issued currency becomes entirely digital, functional distinctions between it and widely-accepted non-sovereign fiat currency start to disappear. The primary way, then, to distinguish between the value of such currencies is to compare the quality of their institutional backing… Read more
The law of insider trading generally moves with the speed of molasses in February. For every two steps forward, there is one (or more) steps backward. But this winter has seen a rapid succession of developments. First, the Himes Bill passed the House of Representatives by an overwhelming margin, but only after its sponsors retreated on its most important provision: the elimination of the “personal benefit rule” from insider trading law. Second, the Bharara Task Force on Insider Trading reported, with a strong and unanimous recommendation that the personal benefit rule be abolished and a new statute passed.… Read more
The number of securities cases filed in federal court continued at a furious pace for the third year in a row. This year-end update highlights what you most need to know in securities litigation trends and developments for the last half of 2019:
- Oral argument in Liu v. SEC, No. 18-1501, is scheduled for March 3, 2020, when the Supreme Court will consider the power of the SEC—and potentially, by extension, other federal agencies—to order “equitable disgorgement” in light of the Supreme Court’s prior ruling in Kokesh v. SEC, 137 S. Ct. 1635 (2017).
- Anticipation for the Supreme
… Read more
Modern finance is fast moving, extremely complex, and contributes to pervasive unknowns. Yet the processes governing how finance is regulated are typically slow, highly deliberative, and often reflect deeply ingrained and incredibly optimistic assumptions about our ability to understand the financial system and the potential impact of regulatory intervention. In our new paper, “Why Financial Regulation Keeps Falling Short,” we identify the key drivers of this fundamental mismatch between finance and financial regulation, demonstrate how this mismatch contributes to undesirable policy outcomes, and lay the conceptual foundations for understanding how the processes governing the creation of financial regulations … Read more
Proponents of enhanced environmental, social and governance (“ESG”) disclosure have identified corporate income tax as a relevant metric. While it is premature to predict how ESG standards in this regard will evolve, a key area of focus is tax arbitrage, including profit-shifting among jurisdictions. Boards should be aware of the possibility of detailed country-by-country public disclosure intended to reveal scenarios involving high profits in jurisdictions with little economic activity and low profits in jurisdictions where a company has a significant presence.
Inspired by the Action Plan on Base Erosion and Profit Shifting of the Organisation for Economic Co-operation and Development, … Read more
President Donald Trump’s proposed $4.8 trillion budget calls for folding the Public Company Accounting Oversight Board (PCAOB), America’s audit watchdog, into the Securities and Exchange Commission, the nation’s primary financial regulator. The stated goal is to eliminate duplicative regulations and save money. It would do neither. Instead, it would send a harmful message that high quality audits are no longer a priority.
The Sarbanes-Oxley Act of 2002 established the PCAOB as a not-for-profit corporation whose mission is to inspect audits, establish audit standards, and enforce compliance with those standards. Sarbanes-Oxley was itself a bipartisan landmark, enacted in response to the … Read more
On 16 January 2020, the Bank of England (the “BoE”), the UK Financial Conduct Authority (the “FCA”) and the Working Group on Sterling Risk-Free Reference Rates (“RFRWG”) published a set of documents outlining priorities and milestones for 2020 on LIBOR transition.
UK regulators have signalled that 2020 is a critical year in the transition efforts from LIBOR to alternative risk-free rates such as the Sterling Overnight Index Average (“SONIA”), the RFRWG recommended replacement rate for Sterling LIBOR-referenced transactions. The suite of publications released last month set out key priorities and milestones for transition progress in 2020, and help to … Read more
The newly released Chief Legal Officers survey (“Survey”) from the Association of Corporate Counsel (“ACC”) is an important governance development to the extent that it supports a board’s ability to exercise oversight of its company’s legal department. Overall, the ACC findings underscore the organizational value of a CLO hierarchically positioned to influence corporate strategy.
A board’s ability to evaluate the Survey results depends on the board’s appreciation of its specific fiduciary obligation to monitor the legal affairs of the organization. This responsibility is most directly satisfied through oversight of the department of legal affairs and extends to satisfaction of … Read more
Recent months have seen institutional investors and other stakeholders, notably BlackRock and State Street, stressing the importance of comparable and decision-useful ESG disclosures by their portfolio companies. Such calls follow in the wake of growing interest among investors and other stakeholders in understanding and assessing the performance of companies based on ESG metrics. While the exact system by which companies will report on ESG issues remains to be determined by the market, it is clear that beginning in 2020, and in the years to follow, companies will be disclosing significant amounts of quantifiable information on a basis that will … Read more
In recent years there has been a surge in research that explores the sources of variation in corporate tax avoidance. Following this stream of research, tax scholars have begun to acknowledge the potential effect of ownership patterns on firms’ tax behavior. A few recent empirical studies have examined the effect of institutional ownership, particularly quasi-indexers, on the tax behavior of portfolio firms. These studies found a significant positive correlation between tax avoidance and institutional ownership, indicating that the emerging ownership structure in the U.S. economy – common ownership – plays an outsized role in instances of corporate tax … Read more
[Editor’s Note: This and the piece that immediately follows offer a point/counterpoint on the SEC’s proxy advisor proposal.] The Council of Institutional Investors opposes the SEC’s proposal to create a new regulatory structure for proxy advisory firms. The proposed rules would codify August 2019 guidance from the commission (issued with no public comment or economic analysis) that proxy advice is “solicitation” under securities law, and then create new conditions for exemptions from solicitation rules necessary to do business as a proxy advisor. CII has provided extensive feedback in response to the SEC’s request for comments on the … Read more
The Securities and Exchange Commission’s (SEC’s) recently proposed Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice are an efficient and necessary response to the “collective action” problem that is imbedded in the shareholder voting of public companies and the deficiencies that this problem creates in the voting recommendations of proxy advisors. The amendments will enhance the value of voting recommendations by requiring proxy advisors to make much needed investments in a few key areas of the voting recommendation process.
The Collective Action Problem Imbedded in Shareholder Voting
Shareholder voting suffers from a significant “collective action” problem. According … Read more
Short selling serves a critical function in the capital markets by encouraging price discovery and preventing the formation of asset bubbles. But recent years have seen a rise in “negative activism,” a novel phenomenon that has flourished in the era of social media and algorithmic trading. The typical negative activist opens a large short position; disseminates sometimes aggressive negative opinion about a public company (often stopping just short of factual falsehoods) on Twitter and elsewhere, which induces a panic and run on the stock price; and rapidly closes that position for a profit, prior to the stock price partially … Read more
The U.K. Competition and Markets Authority (CMA) has published “Guidance on the Functions of the CMA Under the Withdrawal Agreement” (Guidance), which sets out the regulator’s approach to merger and competition cases during the Brexit transition period that will run until at least through December 31, 2020 (Transition Period):
- The Guidance confirms that during the Transition Period, the U.K. and the EU merger procedures will remain closely aligned. The EU competition and merger control rules will continue to apply as if the U.K. were still an EU member state.
- The European Commission (EC) will have exclusive jurisdiction over
… Read more
The allocation of control rights between entrepreneurs and capital providers plays a central role in financial contracting and corporate governance. Debt contracts typically include accounting-based covenants that transfer control rights to lenders when accounting numbers (such as earnings) fall below certain thresholds. A tighter covenant (i.e., a higher threshold) increases the likelihood that the lender gains control, permitting the lender to take actions against the entrepreneur’s will, such as liquidating projects.
One key characteristic of entrepreneurs is that they tend to be overly optimistic about the chances of success of their own projects. After all, individuals who forego other … Read more
CEO compensation typically consists of cash and long-term equity. While the benefits of cash are to some extent fixed, the value of equity-based compensation depends on the market value of the firm. The latter is the key mechanism for motivating managers to act in the best interest of shareholders’ long-term wealth.
In order to maximize the incentives provided by the equity component of their compensation, executives should take risks to maximize their firm’s market value. How they do so can, of course, vary. The most desirable approach would be to engage in more risky projects that would bring long-term returns. … Read more
Institutional investors are increasingly focused on “extra-financial performance” as a predictor of long-term success of companies. Topics like climate change, CO2 emissions reduction, respect for the environment, labour rights, and diversity are more and more factored into investment decisions.
Investors, directors and company management need to work together to leverage the new regulatory environment, address unprecedented environmental and social challenges, and promote disruptive technological innovation to strengthen business models and improve performance.
About the Survey
This global survey, conducted by a team of academics from the Millstein Center for Global Markets and Corporate Ownership at Columbia Law School and Environmental, … Read more
Since passage of the Sarbanes-Oxley Act of 2002, public companies have been more enthusiastic than ever about appointing independent directors with specific expertise. They have often reached into the academy to recruit university professors, where expertise and independent thought thrive. The number of professors on public company boards has tripled since 2002, and the number with law degrees has nearly doubled. Today, nearly one in eight public company directors is a professor and nearly half of all public companies have an academic on the board. The results have been positive, as evidence discussed below shows that these groups are associated … Read more
The Delaware Court of Chancery ruled in In re Appraisal of Panera Bread Company, following a six-day trial, in a 130-page decision issued on January 31, 2020, that the petitioners received more than fair value for each share of Panera Bread Company (“Panera”) in connection with its 2017 acquisition by JAB Holdings B.V. (“JAB”), with the Court relying on the deal price, minus synergies value, as the metric of fair value for the case. Because Panera had paid the appraisal petitioners the full merger price as permitted by Delaware law, it sought a refund of the amount of … Read more
Several decades of research have found that capital structure and financing decisions are influenced not only by market frictions such as taxes and bankruptcy costs but also by conflicts between managers and shareholders. In a new paper, we test whether and to what extent limited rights for shareholders to file derivative lawsuits influence firms’ capital structure and financing decisions.
To examine changes in firms’ capital structure and financing decisions, we exploit the staggered passage of Universal Demand (UD) laws by 23 U.S. states. These laws limit shareholders’ ability to file a derivative lawsuit on behalf of a firm by forcing … Read more
On January 30, the Securities and Exchange Commission Chair Clayton and Commissioners Lee and Peirce each issued statements on climate-related disclosures in SEC filings. The statements evidence some debate within the SEC on this topic, which has attracted considerable recent attention among investors, companies and regulators. The outcome for companies is generally the status quo, as the SEC chose not to include specific requirements on climate change or other environmental, social and governance (ESG) disclosure in the amendments to MD&A it proposed yesterday.
The three statements can be found here: Chair Clayton’s statement; Commissioner Lee’s statement and Commissioner Peirce’s … Read more
Academics, notably in sociology and economics, have long understood that social settings are primary drivers of information transmission and economic outcomes, from hiring decisions to product adoption to resource allocation. However, only recently has there been large-sample empirical evidence to support the intuition that social settings around individuals – networks comprised of connections among people – are important for firm and market outcomes. Our recent paper, “CEO Networks and Shareholder Litigation,” investigates whether executive networks are important in the context of securities class action (SCA) lawsuits.
Recent literature presents evidence that executive networks enable more efficient information flows, … Read more
Over the past 20 years, civil penalties have become an increasingly important part of the SEC’s enforcement program. The agency frequently imposes large monetary penalties, highlights those penalties in press releases, and touts them in end-of-year statistics. Civil penalties are justified as a necessary deterrent to unlawful conduct and a powerful tool for promoting ethical and legal behavior. But with respect to one category of cases – those involving public companies – civil penalties have always been controversial, because the cost of the penalty is ultimately borne by the shareholders who had nothing to do with the misconduct and indeed … Read more
Last year marked the eleventh anniversary of China’s Anti-Monopoly Law (the “AML”). In 2019, China announced the first-ever set of proposed amendments to the AML as well as the introduction of several new regulations aimed at more transparency and efficiency in antitrust enforcement and codifying noteworthy deviations between Chinese and United States and European Union antitrust laws.
In the past year, the State Administration for Market Regulation (“SAMR”) approved five transactions with conditions (i.e., remedies), a slight uptick from four in 2018. The average review time for these five transactions was approximately one year. SAMR did … Read more
Tesla notched a trifecta of (legal) headlines this week, with three inter-related developments coming out of the shareholder challenge to the firm’s 2016 purchase of SolarCity: a settlement, a summary judgment decision, and an almost-certain trial featuring testimony by none other than Elon Musk. When originally announced, Tesla’s $2.6 billion acquisition of SolarCity was hailed as a “no brainer,” and it was eventually approved by a majority of Tesla’s independent shareholders. That said, it was Musk himself who was doing much of the aforementioned hailing – and observers couldn’t help but take note of the appreciable ownership stake he held … Read more
On January 13, 2020, the U.S. Department of the Treasury (“Treasury”) released final regulations (the “Final Regulations”) implementing the updates to the foreign investment review process of the Committee on Foreign Investment in the United States (“CFIUS”) contained in the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”). The Final Regulations, effective February 13, 2020, largely track the September 2019 proposed regulations (the “Proposed Regulations”) to implement FIRRMA’s expansion of CFIUS’s jurisdiction. FIRRMA in turn codified existing CFIUS practice as it has evolved in recent years, particularly … Read more
On September 26, 2019, the SEC released the much-anticipated new rule and form amendments designed to modernize the regulation of Exchange-Traded Funds (ETFs). Rule 6c-11 under the Investment Company Act permits ETFs that satisfy certain conditions to operate without the expense and delay of obtaining an exemptive order from the commission under the act – and it is most welcome.
There is something fascinating about this initiative. What started 28 years ago as a way to avoid the taxation of mutual funds has avoided extensive SEC regulation. Now, there are about 3,000 U.S. ETFs with a total value of … Read more
In In re Essendant Inc. Stockholder Litigation (Dec. 30, 2019), the plaintiff-stockholders of Essendant, Inc. (the “Company”) brought claims against the Company’s directors for their decision to terminate an agreement for a stock-for-stock merger with Genuine Parts Company (“GPC”) in order to enter into an all-cash deal offered by Staples, Inc. and its private equity firm parent, Sycamore Partners. The Delaware Court of Chancery, at the pleading stage of the litigation, rejected the plaintiffs’ contention that Sycamore, although a minority stockholder, was a controlling stockholder of the Company. In so ruling, Vice Chancellor Slights dismissed the plaintiffs’ claims that (i) … Read more
The problems in global financial markets are often similar, even though the capital market structure across jurisdictions differs significantly. The beginning of the 21st century was marked by a spate of international corporate scandals, and the 2007-2009 global financial crisis reflected the global interconnectedness of contemporary international capital markets.
These corporate crises prompted major financial market reforms around the world. Discerning the causes of the crises was no easy feat, yet framing of the underlying problems was critical to the regulatory responses. In relation to the global financial crisis, for example, opinion continues to be divided across different jurisdictions … Read more
There were significant developments in 2019 as courts continued to issue important decisions in this space and significant legislation impacting the residential mortgage-backed securities (“RMBS”) market came into effect. A number of cases have called into question firmly rooted practices in the securitization market. In two actions commenced over the summer in New York federal courts, Petersen v. Chase Card Funding, LLC and Cohen v. Capital One Funding, LLC, credit card holders claimed that their loans became usurious in violation of state usury laws once they were securitized. While federal law permits the originating national banks to … Read more
We write as legal scholars and economists who conduct research and teach in areas of corporate law, securities law, and administrative law. In addition, one of us has previously worked at the Securities and Exchange Commission (“Commission”) as a financial economist and an attorney advisor between 2007 and 2012, in what is now called the Division of Economic & Risk Analysis. None of us is being compensated or otherwise assisted in developing the opinions articulated below. Every word is our own, drafted solely by the three of us.
We submit this letter pursuant to the notice-and-comment request issued by the … Read more
In a letter to directors of public companies, State Street Global Advisors’ President and CEO, Cyrus Taraporevala, reiterated SSgA’s focus on “financially material” ESG issues as “a matter of value, not values.” He also confirmed that SSgA will go beyond engagement and deploy its voting power in director elections to accelerate corporate action on ESG. In SSgA’s view, “fewer than 25% of the companies we’ve evaluated have meaningfully identified, incorporated and disclosed material ESG issues into their strategies.”
As shareholder proposals touching on ESG and sustainability matters proliferate, SSgA has also sounded a cautionary note, flagging that “some shareholder … Read more
The U.S. Securities and Exchange Commission (SEC) has a three-part mission: to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. SEC investigations and enforcement actions play a critical role in carrying out each of these objectives. One of the hallmarks of the investigative process is that it is shrouded in secrecy: The SEC explicitly seeks to protect the identity of those under investigation (SEC, 2017; SEC, 2019). With respect to corporate malfeasance, only SEC staff, senior managers of the company being investigated, and outside counsel are aware of active investigations. While some companies choose to disclose … Read more
In 2020, businesses operating in the UK will need to grapple with the continued uncertainty caused by Brexit and will need to closely monitor a number of important corporate governance and reporting developments expected in the coming year.
Continued Uncertainty Caused by Brexit
When we first wrote about Brexit-related risks in our 2017 memo, “The Change in Administration in the United States and Brexit and Political Uncertainty in the United Kingdom and Europe,” few would have predicted that the ensuing political uncertainty would remain at the top of the UK corporate agenda three years later.
2019 saw businesses continue to … Read more
Advancements in financial technology (FinTech) are revolutionizing product offerings across the financial services industry. As of 2018, more than $50 billion had been invested in 2,500 companies that are redefining the way in which individuals participate in financial markets (Accenture, 2018). Innovations in FinTech also appear to benefit end users, with recent evidence indicating that FinTech is enhancing lending and brokerage activities (D’Acunto et al., 2019; Fuster et al., 2019; Tang, 2019; Vallee and Zeng, 2019). Despite its growing importance and relevance, our understanding of how FinTech affects the production of investment information and the role of sell-side research analysts … Read more
Recent years have witnessed a considerable growth of passive funds at the expense of active funds. This trend picked up in 2019, a year that saw passive funds surpass active funds in total assets under management. The continuous decline of active funds is a cause for concern. Active funds engage with and monitor management and participate in their portfolio companies’ decisions. The costs of these activities are born exclusively by active funds; the benefits, by contrast, are spread over all shareholders, including passive funds that free-ride on the efforts of active funds. Consequently, the contraction of active funds threatens to … Read more
Corporate litigation in Delaware continues to reflect the judicial trend toward honoring the decisions of informed stockholders and independent directors, thus limiting those decisions from costly after-the-fact legal attack. While the boundaries of stockholder ratification and director independence continue to be refined on a case-by-case basis, the broader conceptual trend—to give the last word on corporate action to independent directors and the stockholders who elect them—has taken firm root. Novel issues now rumbling under and through the judicial system implicate a different set of relationships—not between stockholders and directors, but between corporations and society at large. To meet these … Read more
In my forthcoming article, Management Culture & Surveillance, I argue that we should be worried about management overreach in the use of workplace surveillance. Based on new evidence of modern management’s roots in the slave plantations of the U.S. South and West Indies, we should be particularly concerned about management arguments for surveillance based on a business’ perceived need for increased productivity and enterprise control.
In their 2017 landmark article, Limitless Worker Surveillance, professors Ajunwa, Crawford, and Schultz detail the ineffectiveness of U.S. privacy laws to prevent invasive workplace surveillance, and they note that “technologies, … Read more
In early 2019, the government of Hong Kong proposed a bill that would allow for the transfer of criminal suspects to jurisdictions with which it does not have an extradition agreement, including Mainland China. The proposed extradition bill triggered an intense public backlash as opponents believed the bill would expose Hong Kong to China’s legal system, jeopardizing the city’s autonomy and status as a financial hub. Millions of demonstrators took to the streets in June, clashing with law enforcement and demanding withdrawal of the extradition bill. The ongoing protests have taken a heavy toll on Hong Kong’s economy. Industries, including … Read more
For too long, insider trading law has lacked clarity, generated confusion, and failed to keep up with the times. Without a statute specifically directed at insider trading, the law has developed through a series of fact-specific court decisions applying the general anti-fraud provisions of our securities laws across a broadening set of conduct. As a consequence, the law has suffered—and continues to suffer—from uncertainty and ambiguity to a degree not seen in other areas of law, with elements of the offense defined by—and at times, evolving with—court opinions applying particular fact patterns. The rules of the road have … Read more
To assist legal and compliance officers of financial institutions, this memorandum summarizes key recent developments in criminal prosecutions and regulatory enforcement actions involving financial institutions during November and December 2019.
Among the significant matters and trends:
- The last two months saw substantial activity on the insider trading front, and of note the U.S. Court of Appeals for the Second Circuit held in United States v. Blaszczak that the government need not satisfy the “personal-benefit” test for insider trading when proceeding under a Title 18 theory.
- There was additional enforcement activity relating to “spoofing,” including a record-setting fine by the CFTC
… Read more
When firms are takeover targets, they often experience a rise – or run-up – in the price of their stock even before the takeover is publicly announced. The common wisdom about run-ups is that information about the impending takeover is leaked to the market, which causes the stock price to increase. Some of these leaks are unintentional. Opportunistic outsiders overhear conversations or documents land in the wrong hands. Some leaks are driven by greed. Insiders trade on their privileged information to enrich themselves or pass their information on to friends and relatives. But what if information leaks have a strategic … Read more
While activist campaigns were down slightly year-on-year in 2019, stockholder activism remained a prominent tactic. Looking ahead to 2020, there is no reason to suspect a further decline. Activists notched some big wins over the year, notably Elliott in its campaign at AT&T, which saw the telecoms conglomerate announce it would conduct a full review of its portfolio, not make any further major acquisitions, add two new directors and separate the CEO/chair roles after the current CEO retires.
While each situation is different, several themes emerged during the year.
Increasing activity at large-caps
Elliott was able to effect change at … Read more
In recent years, there have been significant changes in the information environment facing firms. In particular, the explosive growth in computing power and the reduction in the costs of disseminating economically relevant information due to the widespread use of the internet have significantly enhanced the ability of investors to produce and transmit information useful for valuing firms’ equity and for evaluating firm’s financing and investment policies. To give one example, Several internet sites allow employees to rate a firm’s management, work culture, compensation schemes, and overall prospects, e.g., Glassdoor Employee Ratings. While it is difficult to argue that such ratings … Read more
Shareholder engagement continues to be an important consideration for companies in communicating their long-term strategy and deepening relationships with their investors, and boards are becoming ever more involved in the process.
In PwC’s 2019 “Annual Corporate Directors Survey,” 51% of the directors reported that a member of their board, apart from the CEO, engaged directly with a shareholder in the past year. One third of more than 300 directors, senior executives and legal advisors surveyed by KPMG in June 2019 reported more significant board engagement with shareholders over the last two to three years than in the past.… Read more