Stock repurchases by issuing corporations have always been controversial. But they have become even more so recently because of the perception that the excess funds used to finance buybacks have come from tax cuts and other sources (such as government bailouts) that were intended to stimulate reinvestment or enhance wages and benefits for workers. As a result, critics have proposed that tax law be amended to discourage buybacks (and possibly dividends as well) on the theory that the benefits of such distributions go mostly to executives (who are compensated in large part with equity) and to already wealthy stockholders.
The … Read more
Most securities fraud class actions under SEC Rule 10b-5 involve revelation of negative information about the defendant company that should have been disclosed earlier – bad news that (allegedly) has been covered up by company agents. The standard remedy in such cases is out-of-pocket damages (OOPs). But this measure of harm is inherently ambiguous. Some courts interpret it as price inflation at the time of purchase. Others interpret it as the difference between the price paid and the price at which a stock settles after corrective disclosure.
Although it might seem that these formulations are synonymous, the latter … Read more
In a forthcoming article, I contend that Professor James Spindler has it wrong in his recent critique of scholarly opposition to securities fraud class actions (SFCAs). Spindler argues that the opposition is based on two mistaken ideas: (1) that compensation for securities fraud is impossible because recovery against the issuer means that defrauded buyers effectively pay themselves (the circularity critique) and (2) that most investors are diversified and thus suffer no real harm from securities fraud since buy-side losses wash out from sell-side gains on average and over time (the diversification critique).
Spindler purports to refute both of these … Read more
In the movie Office Space, the (pretty) good guys hatch a plan to divert to themselves fractions of cents that their employer, Initech, has apparently been overcharging its customers by rounding billings upward. Had any customer discovered the scam, he might have filed a class action. But chances are customers agreed to arbitrate disputes and waived any right to join a class action when they signed a purchase order or clicked agree. So Initech can settle privately with any customer who complains – maybe even under a nondisclosure agreement – and need not change its billing system.
On October 24, … Read more
In the controversial practice of appraisal arbitrage, activist investors buy shares of a corporation to be acquired by merger so as to assert appraisal rights challenging the merger price – which may already have been approved by the target’s stockholders. The practice is controversial because the appraisal remedy is widely seen as intended to protect existing stockholders who are forced to sell their shares in the merger and not to afford hedge funds a way to extract extra returns from the deal. But the puzzle is why appraisal arbitrage is profitable, since the remedy seeks to determine fair prices using … Read more
In a landmark decision now on appeal, In re MFW Shareholders Litigation, the Delaware Chancery Court ruled that a freezeout merger negotiated by an independent special negotiating committee (SNC) and conditioned in advance on approval by a majority-of-the-minority (MOM) vote should be reviewed under the business judgment rule. Before MFW, the practice was to review all such mergers for entire fairness, albeit with the burden on the plaintiff if the merger is either negotiated by an independent SNC or ratified in a fully-informed MOM vote. In contrast, review under the business judgment rule requires plaintiffs to plead and prove their … Read more