John C. Coffee, Jr.

Dual Class Stock: What Is a Fair Compromise?

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In my last post[1], 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

Dual Class Stock: The Shades of Sunset

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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

Bonfire of the Vanities–2018 Style: The Case of Elon Musk

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Elon Musk came close to doing something truly unique. No, not his electric car. Rather, he was about to roll the dice with his shareholders’ equity.

Securities analysts estimate that somewhere between 25 and 35 percent of the value of Tesla would be sacrificed if Musk were no longer its CEO. No one else in Tesla’s management can credibly run the company, and Musk alone appears to be the visionary that can maintain its technological superiority. Yet, he placed this value at risk by rejecting a relatively generous (even soft) settlement offered by the SEC to resolve his notorious tweet … Read more

The Market for Lead Plaintiffs

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A drama is playing out in Boston federal court before a respected judge that could prove to be a legal “Watergate,” one that could reshape class action practice.[1] Combining elements that are both sordid and comic, this litigation has already shown that the leading experts on legal ethics disagree significantly over what must be disclosed to the court approving a class action settlement. More importantly, although this episode could prove to be an isolated aberration, the other possibility is that the behavior at issue in this case may occur regularly. As all New York City tenants know when they … Read more

What Really Drives “Short-Termism”?

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Earlier this month, the CEO of Pepsi Co. suggested to President Trump that eliminating quarterly reporting (and shifting to biannual reporting) would reduce the pressure on managers to focus on the short-term. As impulsive as Elon Musk, the president bought this view hook, line, and sinker and tweeted his proposed shift to the world (and a probably startled SEC).

But what will be the actual impact? Those who have a law and economics orientation will predictably respond that widening reporting frames will present investors with greater uncertainty and risk, with the result that stock prices should decline (and the cost … Read more

Tippees and Tippers:­­ The Impact of Martoma II

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This is a column for insider trading junkies—a special breed who love all the nuances in this very nuanced subject. Late last month, a Second Circuit panel did something fairly unusual: It withdrew a 2017 decision and substituted a new opinion with a new rationale (but still with the same 2-1 division on the panel). The new decision in United States v. Martoma[1] has a less sweeping and more defensible rationale but still deviates from the law in other circuits. In addition, it has some nuances that future cases are certain to explore. Chief among these is the status … Read more

The Irrepressible Myth That SEC Overregulation Has Chilled IPOs

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The following is an abbreviated version of Professor Coffee’s May 23 testimony before the House Financial Services Committee’s Subcommittee on Capital Markets, Securities, and Investments.  The deleted portions of his testimony relate to the specific content of proposed bills to extend and supplement the JOBS Act.

Chairman Huizenga, Ranking Member Maloney, and Fellow Members of the Committee:

I. Introduction

I thank you for inviting me.  I have been asked to comment on 11 proposed bills, all of which seem to have a common source: a 2018 Report entitled, “Expanding the On-Ramp: Recommendations to Help More Companies Go and Stay Public,” … Read more

The Lessons of Xerox: Is New York Law Now Tougher Than Delaware’s?

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It is an old maxim that “Hard cases make bad law.” But it may have a corollary: “Bad facts make hard law.” When a defendant clearly overreaches, the court may not let small details stand in its way. The decision in In re Xerox Corp. Consol. Shareholder Litigation[1]  by Justice Barry Ostrager of the New York Supreme Court may be such a case. Decided at the end of last month, the decision enjoined a shareholder vote on a merger-like transaction between Xerox Corporation and Fujifilm Holdings Corporation (“Fuji”) and required Xerox to waive its advance notice bylaw so that … Read more

Bagman, Fixer, Lobbyist, and Lawyer: Can Michael Cohen Combine All These Roles?

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Once a legal unknown, Michael Cohen made it last week to the front pages of both the New York Times and the Wall Street Journal. Charges swirl around him as the personal fixer for President Trump and the alleged bagman for the payment of hush money by Trump to porn star Stormy Daniels. Daniels’ attorney, Michael Avenatti, has accused Cohen of violating the federal bank fraud statute, and the Department of Justice has identified Cohen as the subject of a criminal investigation.

This brief column will not attempt to evaluate Cohen’s criminal liability (if any), but it will offer … Read more

Securities Litigation in 2017: “It Was the Best of Times, It Was the Worst of Times”

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Securities class actions soared in 2017, jumping from 271 filings in 2016 to a near record 412 filings in 2017 — well above the average of 193 per year for the years 1997 to 2016.[1] Only 2001 was comparable, although both 2001 and 2017 were inflated by special factors.[2] Now add to this growth the $3 billion settlement in the Petrobras litigation earlier this year (plus the highly favorable ruling by the Second Circuit in Petrobras last year).[3] The result may be the same as when the discovery of gold at Sutter’s Mill was announced to the … Read more

What Happens When an Activist Goes on the Board?

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After over a year of work, which included the review of some 635,450 Form 8-Ks filed by 7,799 public companies from January 1, 2000, to September 30, 2016, we think we know at least one answer to the question in the above title: Informed trading soars! We have just posted our research, which we co-authored with former Columbia Law Professor and now SEC Commissioner Robert Jackson and Robert Bishop, a recent Columbia Law graduate, on SSRN,[1] available here. Above all, it shows that following the appointment of a hedge fund-nominated director to the board, the target firm experiences … Read more

The Spotify Listing: Can an “Underwriter-less” IPO Attract Other Unicorns?

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Press reports indicate that Spotify, the music streaming company, is planning an initial public offering in March or April of this year, and that it plans to use a novel “direct listing” approach that has not previously been used at the New York Stock Exchange.[1] Already, it has made a confidential filing of its registration statement with the SEC.  Eager to accommodate Spotify, the NYSE has filed amendments to its listing rules with the SEC (and twice amended this filing, most recently in December).[2] If the news stories are accurate, the SEC has signaled its willingness to approve … Read more

Activism and Informed Trading

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Hedge fund activism has transformed the corporate governance landscape – possibly for better, possibly for worse. But as activist funds emerge as the newest and most potent players in corporate governance, there is one certainty: New agency costs also arise. The activist firm has the de facto ability today to buy a significant block of stock in a target firm (typically 5 percent to 8 percent), announce a new business strategy for the target (often involving increased leverage and asset sales), and then demand board representation (generally two directors, sometimes more) to implement its strategy. Increasingly, the activist gets what … Read more

Confidential Distortion: Dealing with Confidential Witnesses in Securities Litigation

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In a recent article prepared for the ABA’s National Institute on Class Actions, which is now posted on SSRN (available here), I and Professor Alexandra Lahav survey recent class action developments, and I focus particularly on the special case of securities litigation. Here, a unique and problematic feature of securities litigation is the frequent reliance placed by plaintiff’s counsel on confidential witnesses. Nowhere else does one regularly encounter detailed complaints that cite as many as 20 or more confidential witnesses (listed in order as CW-1, CW-2, CW-3, etc.), most describing damaging admissions allegedly made to these unnamed witnesses … Read more

Brexit: The Lessons from Trade Wars

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Brexit has set the stage for a retaliatory trade war that neither the U.K. nor the E.U. wants and that will injure consumers (and others) on both sides. Moreover, it could threaten the U.S. as well, if it leads the U.K. to relax its financial regulatory requirements and return to its former “regulatory-lite” policies in order to compete more effectively (and thereby lead a regulatory race to the bottom).

In a paper just posted on SSRN (available here) that I deliver at the University of Paris/Sorbonne in two weeks, I analyze how trade wars begin and play out, applying … Read more

Cheating the Algorithm: The New “Pump and Dump” Fraud

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Old frauds never die. Nor do they fade away. Rather, they mutate and morph into new configurations in response to new opportunities (which new technologies usually create). Thus, the traditional boiler room “pump and dump” scheme was a product of the widespread adoption of the telephone, which allowed high pressure salesmen to reach hundreds of gullible customers in a day. Today, an analogous new technological development is inviting new forms of fraud. The new development is algorithmic trading (which by some estimates now accounts for 30 percent of stock trading[1]). Computers are programmed to trade in a micro-second … Read more

The Financial CHOICE Act of 2017 and the Future of SEC Administrative Enforcement

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Professor John C. Coffee, Jr. of Columbia Law School is scheduled to speak on June 22 before the Securities and Exchange Commission’s Investor Advisory Committee, which asked him to address the CHOICE Act’s impact on the SEC’s enforcement powers. These are his remarks:

The Financial CHOICE Act of 2017 has now passed the House of Representatives on a strict party-line vote (winning not a single Democratic vote), but its prospects in the Senate seem dim. Nonetheless, a fair chance exists that individual provisions of this bill will make it through the Senate in one or more watered-down compromises. But which … Read more

The Financial CHOICE Act of 2017: Will Collective Amnesia Triumph?

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Notwithstanding decidedly hostile testimony last month from this humble columnist,[1] the U.S. House of Representatives will soon pass legislation (probably on a strict party-line basis) entitled, “The Financial CHOICE Act of 2017” (H.R. 10) (which acronym stands for “Creating Hope and Optimism for Investors, Corporations, and Entrepreneurs”).  Despite this cutesy and innocuous title, the CHOICE Act proposes dangerous and radical surgery that would gut those provisions of the Dodd-Frank Act that seek to prevent the failure of a single major bank from setting off a chain reaction that could bring down all interconnected banks.  Indeed, the Act reads as … Read more

The Race to the Bottom: Is the Last Stop New York?

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The practice of nominal shareholder plaintiffs challenging virtually every sizable corporate merger with a lawsuit alleging a fiduciary breach has been a scandal for some time.  At least when brought by the “bottom fishers” of the plaintiff’s bar, these suits result invariably in a nonmonetary, “disclosure only” settlement that benefits no shareholder, but does justify an award of fees to the plaintiff’s attorney (the only party with an economic interest in the suit).

The near inevitability of M&A litigation is a relatively recent phenomenon, as the rate soared after 2000.  One study finds that only 12 percent of M&A transactions … Read more

How Not to Write a Class Action “Reform” Bill

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It was predictable. Given a solidly Republican Congress and a Republican president, sooner or later, an effort would be made in the Trump administration to curb class actions. Not surprisingly, it has come sooner, with the “Fairness in Class Action Litigation Act of 2017” (H.R. 985). A motley assortment of procedural “reforms”—some good, many bad, and most overbroad—H.R. 985 has been introduced by Representative Bob Goodlatte (R-Va.), chairman of the House Judiciary Committee. Much of this bill is a reincarnation of a similar class action “reform” bill that passed the House in 2015, but died in the Senate (possibly because … Read more