This brief column will assert that three developments that seem unrelated are in fact closely related and may soon impact U.S. corporate governance with the force of a freight train. This column summarizes a longer article just posted by this author on SSRN.
Development No. 1: Stock ownership in the U.S. has now reached an extraordinary level of concentration. The Big Three — BlackRock, Inc., State Street Global Advisors, and Vanguard Group — now hold collectively over 20% of S&P companies, vote 25% of the shares voted, and, according to Lucian Bebchuk, will eventually hold 40%.… Read more
Experienced litigators know that an adverse appellate decision (even from the U.S. Supreme Court) rarely ends their case. The question is instead: What is the next move? What defenses do we fall back on? So it is likely to be with Liu v. SEC, which, by an 8-1 margin, resolved that the SEC does have the authority to order disgorgement. Still, the Court subjected this authority to the important qualifications that: (1) the ill-gotten gains consist only of the net gains (with all “legitimate expenses” being deducted); (2) the recovery is returned to the injured investors (and thus not … Read more
Two extraordinary accounting scandals — one at Luckin Coffee Inc. in China and the other at Wirecard AG, the German digital payments firm — have revealed brazen and bankrupting frauds, directed by the most senior executives at each firm. Together, they tend to support three conclusions:
- Stealing candy from a baby appears to be harder than getting fraudulent financial statements past a Big 4 accounting firm;
- If you want to detect fraud, forget the accountants and contact your local short sellers; they are the real detectives today; and
- When the fraud is really egregious, we often find that the regulator
… Read more
The CARES Act was passed under intense pressure and with minimal transparency. The consequence of this opaque process is that there are some surprising windfalls. No criticism is here expressed of the act’s purpose, but Wall Street knows one thing about federal subsidies: Charity begins at home.
The centerpiece of the CARES Act is Section 1102’s “Paycheck protection program,” which will make available some $349 billion to be lent to small businesses in loans guaranteed by the Small Business Administration (“SBA”). These loans will carry a very low 1% interest rate, and the expectation is that most of the … Read more
The coronavirus’ impact across the United States will make an epic, even Tolstoyan, saga, sweeping across all levels of American society and featuring brave heroes and tragic victims. But so far, this story has lacked one figure that every drama needs: a clear villain – someone the public can despise. No, President Trump cannot play this role. Reckless, ignorant, and delusional as he may be, he can only play the fool of the story, but not the villain, because he has not been profiting off the tragedies of others.
A true villain would be useful. In the 1930s, much of … 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
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
By last count, there are now 29 U.S. law firms with at least 1,000 lawyers. In a few weeks, this number should rise to 32, primarily as the result of mergers. My prediction is that this number will climb to well over 50 by the end of this decade. Still, two inconsistent trends are peaking at the same time: (1) large firms are growing in size, but (2) growth in the number of equity partners at these firms has stalled (and may even have declined). According to the annual survey by the National Law Journal, the number of … Read more
Most everyone has had their say about the collapse of WeWork’s failed initial public offering (“IPO”). Clearly, this failure was overdetermined, as many competing causes can explain it, including: (1) the extraordinary level of self-dealing that its CEO, Adam Neumann, regularly engaged in; (2) the corporate governance structure that locked up all voting power and control in him; (3) a system of non-GAAP metrics that more than raised eyebrows; (4) an extraordinarily high valuation for a company that, despite its claims of being a high-tech start-up, was closer to a simple real estate firm; and (5) the unstable personality … Read more
The Blue Sky Blog has never before run eulogies, but Chancellor William Allen is a special case. Whether one evaluates him in terms of his historical significance, his unique craftsmanship as a judge, or his personal character and the courage he has shown in the face of adversity, he has few equals. He bridged an important transition during which Delaware’s jurisprudence went from being viewed skeptically as predictably pro-management to the current era in which Delaware decisions receive the same close and respectful attention as might be given to a U.S. Supreme Court decision. Chancellor Allen was not alone in … Read more
This post comes to us from John C. Coffee, Jr., the Adolf A. Berle Professor of Law at Columbia University Law School and the Director of its Center on Corporate Governance. These slides accompanied a lunch address that he gave at a Conference, entitled “Law Firms in the 21st Century,” which was held at Columbia on September 14, 2019.
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Lord Denning, a highly quotable British judge, once remarked:
“As a moth is drawn to the light, so is a litigant drawn to the United States.”
Some reasons for this strong attraction are obvious: (1) the U.S. (and only a few other nations) authorize opt-out class actions; (2) the U.S. permits (and generously awards) contingent fees; (3) the U.S. has no “loser pays” rule (and most other countries do); and (4) the U.S. uses juries in civil cases and permits punitive damages.
As I discuss in a recent paper posted on SSRN, available here, the strongest evidence of … Read more
I am very happy and honored to be back before this committee. I have been asked to comment on several proposed bills, all of which I basically support, but I will focus my limited time today primarily on Congressman Himes’ Discussion Draft of an “Insider Trading Prohibition Act.” I want to commend Congressman Himes for having supervised the drafting of a very careful, balanced and sophisticated bill that should serve as a model for a long overdue effort to codify the law of insider trading. To date, the law of insider trading has been solely the product of judicial law-making, … Read more
Stock market manipulation has been around since shortly after stock markets were invented. Everyone is familiar with the methodology in the standard “pump and dump” scheme: False rumors are circulated, the stock is bid up by the manipulators, supply might be constrained, and, once the public’s appetite is aroused, the stock is dumped by the manipulators.
But the internet has changed all that. No need exists today for the boiler shop or its battery of phones or even carefully assembled lists of suckers. All that one needs today is to put one’s message (written under a pseudonym) on a blog … Read more
In the bizarre world that Washington politics has become, few stories are more fascinating than Jeff Bezos’ accusation that the National Enquirer and its parent, American Media Inc., committed blackmail and extortion by threatening to reveal nude pictures of him and his girlfriend unless he would “publicly affirm that The Enquirer’s reporting on his affair was not motivated by political concerns.” Let’s assume that everything Bezos said is true. Most of us sympathize with him (after all, being the world’s richest man is a tough role that does make one awfully vulnerable). All kinds of political motives for threatening … Read more
Clemenceau was right. Reforming a profession cannot be left to the professionals. A cascade of auditing scandals — in the U.K., the U.S., Europe, and South Africa — has convinced many that reform is necessary. The political reaction has been the most intense in the U.K., where two governmental reports were released last month, each sharply critical of the auditing profession and its regulation. One has called for a new audit regulator that would be financially independent of the industry, and the other by the U.K.’s Competition and Markets Authority (“CMA”) has proposed a number of measures to … Read more
Securities litigation is growing at a prodigious rate. Is that good or bad? This column will answer that we have to unpack this phenomenon and realize that very different things (with very different implications) are happening simultaneously. Let’s begin with the basic data: Some 403 federal securities class actions were filed in 2018, down slightly from 412 in 2017 (which was the highest year since 2001), but more than 200% of the average number for 1996 to 2016 (which was 193). Viewed together, 2017 and 2018 show that the rate of securities class action filings is accelerating, and this … Read more
Forever is a long time — indeed, too long. That is the essence of my answer to my two friends and colleagues — professors Zohar Goshen and Joshua Mitts — who each argue against mandatory sunset provisions on super-voting stock (Professor Gordon provides an overview with which I largely concur). Even if one accepts the Goshen/Mitts premise that the other shareholders want the founder to have total control (in order to pursue his “idiosyncratic vision” for the company), the probability is high that, at some point, the majority of the shareholders will want to limit or end that total control. … Read more
In my last post, I focused on the Council of Institutional Investors’ (“CII”) recent proposal to the New York Stock Exchange and Nasdaq to impose a listing condition that any super-voting rights on dual class stock must expire within at least seven years of listing. Although I sympathized with the CII’s goal and believe dual class capitalizations to be undesirable in the case of a public corporation, I also recognized that we cannot expect the holder of a control block to stand by passively and watch his voting power dissipate. Thus, as I noted, the control holder might … Read more
The most important issue in corporate governance today is dual class capitalization, and the most important recent development is the petition submitted on October 24, 2018 by the Council of Institutional Investors (“CII”) to both the New York Stock Exchange and Nasdaq, asking them to place a “sunset” on differentials in voting rights. Under the CII’s proposal, both exchanges would agree not to list an initial public offering (“IPO”) that had dual classes of stock with different voting rights, unless the disparity in per share voting power ended no later than seven years after the IPO. The CII sees this … Read more