Why the SEC’s Proposal for “Modernization of Beneficial Ownership Reporting” Is Flawed

Last February, the Securities and Exchange Commission proposed to “modernize” the reporting of beneficial ownership of a company’s stock under section 13(d) of the 1934 Securities Exchange Act.  As I explained in a recent comment letter to the SEC, the proposal is flawed in several ways. First, it risks suppressing proxy contests, which are the principal, if not the sole, method for holding corporate managers accountable to shareholders. Second, to the degree the Commission is concerned about improper tipping of information related to activist engagements, that concern can and should be addressed by developing new rules specific to such tipping … Read more

The Twitter Board Bears Personal Responsibility for a Bad Outcome in the Twitter Sale

Let’s be clear about this: The Twitter board was under no legal compulsion to accept Elon Musk’s offer for the company and, from a corporate governance structural point of view, was in an unassailable position until the 2024 shareholders meeting.  The single motivating factor in its decision, apparently, was that the deal was a good one for Twitter shareholders, without apparent regard for how Musk might run the company and the consequence for the social media infrastructure that Twitter had created, much less the public welfare.  In my opinion, the board’s conduct was shockingly near-sighted, and the predictable adverse consequences … Read more

Corporate Vote Suppression: A Counter-Response to Eric Robinson

I appreciate the engagement by long-term pill observer Eric Robinson with my Corporate Vote Suppression piece. I am also glad that he agrees that the pill in The Williams Companies Shareholder Litigation ought to be struck down, though he narrowly confines his ground for supporting the Delaware Chancery Court’s decision to do so.  His invitation to re-examine Moran v. Household International shows how far the anti-activist pill has strayed from its initial justification (and limitation).  Moran sustained a “flip-over pill” against the threat of a front-loaded two-tier hostile bid and countenanced a 20 percent pill trigger because it represented the … Read more

Corporate Vote Suppression: The Anti-Activist Pill in The Williams Companies Stockholder Litigation

The Delaware Supreme Court has before it a case that could dramatically reshape corporate governance in the United States.  The case, The Williams Companies Stockholder Litigation, addresses the legitimacy of an “anti-activist pill” whose particularly aggressive features would severely limit both an activist’s economic incentives and its capacity to organize other shareholders.  The implications reach well beyond the hedge-fund wolf packs purportedly roaming the corporate landscape. The validation of such an anti-activist pill would throttle the incipient ESG activist movement that recently illustrated its potential in successful challenges at Exxon-Mobil. It would also require the Delaware courts to come … Read more

Corporate Governance, the Depth of Altruism, and the Polyphony of Voice

This post responds to the paper, Exit vs. Voice, by Eleonora Broccardo, Oliver Hart, and Luigi Zingales (BHZ),[1] a deep engagement with the choice between alternative means by which an “altruistic” investor can influence corporate behavior.  An “altruistic” investor is one who derives some utility from conferring a social benefit with the goal of inducing firms to change their behavior in a socially responsible way.  The two possible mechanisms are “exit” (divestment) and “voice” (shareholder voting).

BHZ follow prior work by Hart and Zingales that argues that investors can reasonably believe that firms can provide public goods at a … Read more

The Valuation and Governance Bubbles of Silicon Valley

The rise and fall of The We Company IPO bubble is one of those events that, like the subprime mortgage bubble that preceded the financial crisis, calls for an examination of market structures that could have produced such a precipitous turnabout.  Indeed, the two bubbles share similar features, namely, structural features that favor the expression of positive sentiments and make it difficult to express negative sentiments.  We call this “one-sided market sentiment.”

Some of the most famous moments of the financial crisis, memorialized in print and film, turned on how intrepid traders determined that impenetrably complex mortgage-backed securities were overvalued … Read more

Addressing Economic Insecurity: Why Social Insurance Is Better Than Corporate Governance Reform

The question that emerges from proposals to elevate a corporation’s “purpose,”[1] the call for co-determination in Senator Warren’s Accountable Capitalism Act and now the Business Roundtable’s purported elevation of stakeholder interests, is whether corporate governance is capable of playing the important role in addressing social problems that some have posited.  Such an approach seems to suggest that the social challenges we face can be dealt with at the level of the firm – that is, by specific corporations and their boards.  This assumption seems to animate the argument for firm-specific tailoring of corporate governance in light of distinct … Read more

Dual Class Common Stock: An Issue of Public and Private Law

Professor Coffee’s two CLS Blue Sky Blog pieces on dual class common stock (here and here) provide a welcome stimulus for further reflection.

The debate over dual class common arises at the hinge of public law vs. private law conceptions of corporate governance.  In the early 20th century, dual class common stock was used by financiers to retain control of the companies that they shepherded to public stock markets. You could certainly spin a private law story that the bankers used their control to minimize managerial agency costs and to provide reputational services at a time of … Read more

How Europe Can Survive Without Introducing Sovereign Debt Limits

EU financial policymakers appear to be once more in a deadlock situation over proposals to limit the sovereign risk exposure of European banks. The strong exposure of some banks in the southern European periphery in their national sovereign’s debt was seen by many as one of the contributing factors to the ongoing sovereign debt crisis (Acharya et al. 2014, Beltratti & Stulz 2015; Brunnermeier et al. 2016). Powerful incentives have encouraged financial institutions to buy and hold government bonds in the past (Gros 2013). In fact, this was the intellectual background for the policy framework known as the Banking Union, … Read more

Shareholder Activism, the Short-Termist Red-Herring, and the Need for Corporate Governance Reform

The “meh” economy that accounts for some of the sourness in the American electorate is partly due to a design flaw in the US corporate governance system.  One proffered diagnosis is that  companies invest for the short term and are too quick to return cash to shareholders through stock repurchases.  Why? It’s the attack of hedge funds, shareholder activists looking for short term gain even at the expense of investments that would produce higher returns over the long run, and, along the way, would lead to employment gains and then wage gains.  What follows, then, is a prescription for changes … Read more

Greece: What About the Banks?

A recent news story gives us a sobering anecdote about the Greek crisis: a merchant who must conduct all his business in cash because he can neither receive credit card payments nor pay vendors with electronic transfers. This means that the Greek banking system is failing to provide a payment system, a core function.   At first blush, this looks like another piece of the same crisis story we’ve heard for some time. But it is important to distinguish the banking system and its woes from the refusal of the “Troika” to extend a bailout program for the Greek government over … Read more

The Sotheby’s Poison Pill Case: The Plate Tectonics of Delaware Corporate Governance

The best part of a Delaware Chancery Court opinion is the first 30 or so pages. In most important cases, the opinion typically starts by telling a story – a detailed account of the people who figure in the dispute, what they did, their motives and personalities, and how this character-driven narrative resulted in the dispute the court must resolve.  Often there is drama: exposition, crisis and denouement.  The recent decision over the validity of a poison pill invoked to disadvantage Third Point’s effort to dislodge Sotheby’s management is a great example.  The interest and importance of the case is … Read more

How to Save Bank Resolution in the European Banking Union

The Single Resolution Mechanism (SRM) just enacted by the European Parliament will fail in its essential mission of managing the failure of a systemically important bank in a way that overcomes the fatal link between sovereigns and their banks. The SRM simply provides no strategy to avoid contagion from a bank failure because depositors and short-term creditors are not adequately protected, due to an insufficient resolution fund and the absence of a credible, centralized deposit insurance scheme.  If bank resolution is not a credible threat, then the Single Supervisory Mechanism of the European Banking Union will be a paper tiger.… Read more

Proposals to “Reform” the Section 13D Rules: Getting it Precisely Backwards

The current proposals to accelerate the timing of beneficial ownership disclosure under Section 13(d) of the 1934 Securities Exchange Act and to broaden the definition of beneficial ownership to include derivative positions that provide economic exposure to stock price movement but not a right to vote or acquire stock, gets the problem precisely backwards.  The mismatch of problem and solution is apparent when we focus on two dates:  1968, when the Williams Act adding Section 13 was adopted, and 2010, when Section 766 of the Dodd-Frank legislation gave the SEC the authority, but not the obligation, to consider whether derivative … Read more

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Editor's Tweet: Profs. Gilson and Gordon on Proposals to “Reform” the Section 13D Rules: Getting it Precisely Backwards

Activist Investors and the Revaluation of Governance Rights

Equity ownership in the United States no longer reflects the dispersed share ownership of the canonical Berle-Means firm. Instead, in our new working paper, The Agency Costs of Agency Capital:  Activist Investors and the Revaluation of Governance Rights, Ron Gilson and I observe the reconcentration of ownership in the hands of institutional investment intermediaries, which gives rise to what we call “the agency costs of agency capitalism.”

This ownership change has occurred because of (i) political decisions to privatize the provision of retirement savings and to require funding of such provision and (ii) capital market developments that favor investment … Read more

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Editor's Tweet: Professor Jeffrey N. Gordon of Columbia Law School discusses Activist Investors and the Revaluation of Governance Rights

Money Market Fund Reform: Endorsement of the Minimum Balance at Risk Proposal

On February 28, I submitted a letter on Money Market Fund Reform to the Financial Stability Oversight Council in response to their November 2012 request for comments on a number of alternative proposals.  I endorse the so-called “Minimum Balance at Risk Proposal,” in which fund sponsors would create a capital buffer by contributing or raising capital of one percent of a money market fund’s assets while fund investors would be subject to delayed redemption of three percent of their account over $100,000.  This approach could cause sponsors to internalize the costs of portfolio security selection while forcing large fund investors … Read more

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Editor's Tweet: Professor Jeffrey N. Gordon of Columbia Law School discusses Money Market Fund Reform