Bankruptcy and Restructuring

Shearman & Sterling discusses Making the Safe Harbors Safe Again: Second Circuit Holds State Law Constructive Fraudulent Conveyance Claims Are Preempted by the Safe Harbor of Section 546(e) of the Bankruptcy Code

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In a March 29, 2016 decision,[1] the United States Court of Appeals for the Second Circuit (the “Court of Appeals”) held that creditors are preempted from asserting state law constructive fraudulent conveyance claims by virtue of the Bankruptcy Code’s “safe harbors” that, among other things, exempt transfers made in connection with a contract for the purchase, sale or loan of a security (here, in the context of a leveraged buyout (“LBO”)), from being clawed back into the bankruptcy estate for distribution to creditors. The decision will serve to promote finality and certainty for investors by limiting the circumstances (e.g.… Read more

Disciplining Corporate Boards and Debtholders Through Targeted Proxy Access

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Corporate directors inevitably must make real-time decisions on complex and nuanced matters that impact not only the company, but also the company’s various stakeholders—e.g., shareholders, creditors, and employees.  The pressure cooker that often is the corporate boardroom is not for the faint of heart.  The directors’ job becomes even more challenging when the company experiences a financial or operational setback.  The divergence in interests among the company’ stakeholders intensifies, and there rarely is one clear path forward.

In theory, state law fiduciary duties should guide directors’ decisions in these difficult situations and protect the company’s and its shareholders’ interests.  In … Read more

Professor Kate Judge Honored for Leading Corporate and Securities Law Article

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The work of Columbia Law School Professor Kate Judge appears in the list of twelve best corporate and securities law articles in 2015, based on a poll conducted by the Corporate Practice Commentator.  Teachers in corporate and securities law were asked to select the best corporate and securities articles from a list of articles published and indexed in legal journals during 2015.  More than 540 articles were on the list.  Professor Judge was selected for her article Intermediary Influence appearing in the University of Chicago Law Review.… Read more

The Hostile Poison Pill

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Whether one ascribes to the agency theory of shareholder primacy or the contractarian theory of director primacy, boards of directors have great discretion in determining whether, when, and how to sell the corporation.  Defensive tactics, like poison pills, can be tools in wielding that discretion in the service of creating shareholder value.  However, a poison pill designed either to oppress a minority shareholder, as in eBay v. Newmark,[1] or to minimize the impact of activist shareholders, as in Versata Enterprises, Inc. v. Selectica, Inc.,[2] seems to exceed the “maximum dosage” of the pill.  The “tax benefits preservation … Read more

Private Offerings and Public Ends: Reconsidering the Regime for Classification of Investors Under the Securities Act of 1933

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To achieve a growing number of public, social, civic goals, we draw on the power of financial markets.  Parents who can afford to save for the cost of their children’s college education rely on the market when they put money into college savings plans like New York’s 529 College Savings Program, for example, and so do workers counting on pension funds to provide income in retirement.

As long as these investments produce the needed return, all is well, but when they do not, they undermine the public end they were supposed to serve. The riskiness of investments made in service … Read more

What Drives Corporate Inversions?

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A corporate inversion involves the relocation of a corporation’s legal domicile to a lower-tax nation (host country) while retaining its material operations in its higher-tax country of origin (home country).  Corporations have been engaging in inversions for over three decades.  The first inversion in 1982 occurred when Louisiana-based construction firm McDermott International converted one of its cash-rich Panama-based subsidiaries into the new parent firm, thereby paying much lower income taxes.

Corporate inversions have become headline news again in the US. Last year, US-based pharmaceutical company Pfizer announced a merger with Ireland-based Allergan. Pfizer expected to reduce its effective tax rate … Read more

The Threat of Hedge Fund Activism Disciplines Managers and Benefits Shareholders. But What Happens to Creditors?

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Hedge fund activism is the latest rave in corporate governance. Activist hedge funds build stakes in target firms in order to press management for various changes. When managers are uncooperative, they may just be forced to step down. Lest you think only managers of small, not well-established firms have reason to fear, some of the most powerful managers in corporate America, for example the CEOs of Bob Evans, Hertz, Sotheby’s, Yahoo, etc., have all failed to avoid such fate. It appears that no firm is immune to the threat of HFA.

Managers, needless to say, have great incentive to avoid … Read more

Financial Distress Risk in Initial Public Offerings: How Much Do Venture Capitalists Matter?

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On January 7th 2016, Thomson Reuters and the National Venture Capital Association (NVCA) published their Exit Poll Report, which stated that in the U.S. 77 venture capital (VC)-backed initial public offerings (IPOs) raised $9.4 billion in 2015. Over the same period, 93 non-VC-backed U.S. companies went public, raising $23.9 billion (Ernest & Young – IPO Global Trends 2015). For experts in the field of VC investments these numbers cannot appear surprising: the contribution by VCs to the growth of American stock exchanges is a well-documented phenomenon (e.g., Megginson and Weiss, 1991; Lee and Wahal, 2004; Nahata, 2008). … Read more

Notice of Opportunity: Have You Ever Thought of Entering Academia?

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Columbia Law School is looking for an Editor-at-Large to oversee and administer the Columbia Law School Blue Sky Blog.  The Blog, now completing its third year, has grown rapidly and become one of the most read sources of current information and opinion on corporate law, securities law, and financial regulatory issues, including white collar crime, enforcement, antitrust, restructuring and kindred topics.  The Blog’s content presents legal developments and insights from a range of sources, including practitioners, academics and regulatory bodies.  A new post is generally published at least once every weekday and the Blog also highlights important news developments in … Read more

CEO’s Inside Debt and Dynamics of Capital Structure

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A widely-held view in financial economics is that CEOs holding a non-diversified wealth portfolio tied to the firm are likely to be more risk-averse when making corporate decisions than what diversified shareholders would prefer. To reduce this divergence in attitude toward risk between CEOs and shareholders, equity-based compensation such as stock and stock option grants that offer payoff structures similar to what shareholders receive is often used in the CEOs compensation package. The purpose is to align the interests of CEOs with that of shareholders, and lead to corporate decisions consistent with shareholders’ interests.

In recent years, there has been … Read more

Bond Market Investor Herding: Evidence From the European Financial Crisis

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Herd behavior is a widely used notion met in different contexts and disciplines, from neurology and zoology to sociology, psychology, economics and finance. In economics and finance the term herd behavior usually suggests the process where agents tend to imitate each other’s actions and/or base their decisions upon the actions of others. This behavior may not always indicate irrational agents. For instance, market participants may infer information from actions of previous participants, investors may react to the arrival of fundamental information or analysts and institutional investors may herd in order to protect their reputation. For example, Bikhchandani and Sharma (2001) … Read more

The Association Between Corporate General Counsel and Firm Credit Risk

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The role of the corporate general counsel (GC) has evolved over the past several decades. Traditionally, the GC served as an internal monitor via his/her gatekeeping functions to ensure that firms and their personnel acted legally and responsibly in business matters. In this sense, GCs are similar to other gatekeepers who are responsible for ensuring that firms engage in “best practices” (e.g., auditors, safety inspectors, etc.).

Over time, increases in business complexity and regulation have altered the GC’s responsibilities to include more advisory and entrepreneurial tasks. Internal counsel is now expected to expand the role of law and legal practice … Read more

Shearman & Sterling explains SDNY Bankruptcy Court Holding That Avoidance Powers Can Be Applied Extraterritorially, and Resulting Split Within the SDNY

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On January 4, 2016, the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) deviated from SDNY precedent and held that, despite the absence of clear Congressional intent, the avoidance powers provided for under Section 548 of the Bankruptcy Code can be applied extraterritorially. As a result, a fraudulent transfer of property of a debtor’s estate that occurs outside of the United States can be recovered under Section 550 of the Bankruptcy Code. This ruling creates a split among courts within the Southern District of New York regarding the reach of avoidance powers when it … Read more

Latham & Watkins explains US Loan Market Adaptations to European Bail-In Directive

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European Economic Area (EEA) financial institutions are now subject to a new set of regulatory requirements designed to avoid taxpayers bailing out banks in the event of another banking crisis — a central component of which is that EU member state bank regulators have been provided with broad new “bail-in” powers to write down (including to zero), convert to equity or otherwise modify unsecured liabilities of failing financial institutions.
These new rules require an “EEA financial institution” (defined below) to include a “contractual recognition of bail-in clause” in almost every document to which it is a party that is governed … Read more

CEO Power, Government Monitoring, and Bank Dividends

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In September 2007, Northern Rock, a British bank, sought and received liquidity support from the Bank of England because of financial difficulties resulting from the global financial crisis. As a result of mounting political pressure that Northern Rock was exploiting taxpayers’ money to pay its shareholders, the bank decided to scrap a £59m interim dividend payout, which had been announced before the beginning of the crisis (Financial Times, 2007).

Recent academic literature (Acharya et al., 2011; Onali, 2014) shows that banks in financial distress pay dividends to exploit government support, and this results in a transfer of bank default risk … Read more

Time to Settle Sovereign Debt’s “Trial of the Century”?

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Once again, NML v. Argentina is in the spotlight. Sovereign debt’s “trial of the century”[1] has been the focal point of intense academic and policy debates, prompted a Supreme Court decision, and even triggered a contested default by Argentina in 2014. But the spotlight now points in a different direction. With a newly elected government, Argentina’s decade-long standoff with holdout creditors is set for negotiations—and potentially—a final settlement. In our article, we analyze key economic and legal factors underlying the NML litigation, with a particular emphasis on issues relevant to a potential settlement.

Argentina’s Holdout Litigation

Argentina’s … Read more

Securitisation and Post-Crisis Financial Regulation

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There are few types of debt as internationally issued and traded as the debt securities issued in securitisation (in the United States, spelled securitization) transactions. European investors commonly invest in securities issued in U.S. securitisation transactions, and vice versa.

It is generally agreed that securitisation’s abuses contributed to the global financial crisis. Repayment of securities issued in certain highly leveraged securitisation transactions was so sensitive to cash-flow variations that, when the cash-flow assumptions turned out to be wrong, many of these highly rated securities defaulted or were downgraded. That, in turn, sparked a loss of confidence in the value of … Read more

Why Banks Want to Be Complex

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The quasi collapse of the global financial system during the crisis of 2007-2009 has triggered an extensive debate about the role of large complex banks. On the one hand, banks are seen as “too complex to fail”, and researchers and policy makers argue that the main danger is that financial institutions and markets are becoming “too big to understand” or “too complex to depict”, and therefore need to shrink and be simplified. On the other hand, bankers argue that caps on bank size are inefficient because both size and complexity help banks diversify risks and innovate to create additional profit … Read more

The Fed’s TLAC Proposal Would Impose the Costs of Resolving Failed Megabanks on Ordinary Investors and Taxpayers

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In two previous posts,[1] I described the financial industry’s “single point of entry” (SPOE) strategy for resolving failed megabanks. The SPOE approach – which has been endorsed by the Federal Reserve Board (Fed) and other regulators – could be implemented under the Orderly Liquidation Authority (OLA) established by Title II of the Dodd-Frank Act or under a proposed new “Chapter 14” of the Bankruptcy Code. As I explained in my previous posts and a forthcoming law review article,[2] an SPOE resolution would involve only the parent holding company of a failed megabank and would impose losses only on … Read more