Business Law Prof Blog

Sovereign Wealth Funds as Shareholders

I have posted to SSRN a preliminary draft of a paper entitled "Sovereigns as Shareholders".  Here is the abstract:

Abstract:     
This paper considers the increasing impact of sovereign wealth funds as equity investors. Sovereign investment has been viewed with suspicion because sovereign wealth funds, as tools of sovereign entities, could be used for political rather than investment purposes. While this risk is considerable, much of the discussion surrounding sovereign investment ignores or minimizes the mitigating effect of a number of regulatory, economic and political factors. This paper argues that continued care, but not additional regulation, is necessary to ensure that U.S. interests are not jeopardized by sovereign investment in U.S. enterprises. However, while the U.S. is able to protect its interests within its markets, other countries may not have the regulatory structure or political power to adequately defend their interests. Additionally, U.S. interests could be harmed by politically-motivated sovereign investment in other countries. As a result, this paper argues in support of efforts to establish a code of conduct for sovereign investment.

Comments are welcome.

Posted by: Paul Rose

New Form D Requirements

The SEC continues to tinker with private equity offerings by proposing changes to Form D, the disclosure document for Reg D offerings.  All companies must file Form D electronically by March 16, 2009 (or voluntarily after September of this year).  The electronic filings will be easy for the public to access (the old ones required a trip to Washington).  The public nature of the filings has caused the SEC to eliminate the requirement that 10% or larger shareholder must be disclosed (venture capital funds will retain anonymity).  Moreover, there is no longer a requirement that the identity of limited partners be disclosed (encouraging start-ups to use partnership forms of financing once again). Once again the SEC has not gone far enough.  The Form was designed to notifiy the SEC of Reg D offerings (to stop fraud) not the public.  Now that the filings are on line they will become public disclosure documents more than SEC notices.  Why should the public know at all how a private company is financing itself?

Rule 144 and 145 Changes

Effective February 15th, new versions of SEC Rules 144 and 145 went into effect.  There are some major changes hidden here.  First,  Rule 144 reduces the required holding period to only six months for "restricted stock" of a reporting issuer.  Reporting issuers will be much encouraged to use private stock offerings.  More important perhaps is that investors of non-reporting issuers that are looking to become reporting issuers in IPOs will enjoy a 90 a scant required ninety day holding period after the IPO.  The investors no longer need to demand listing covenants (piggy-back or S8 offerings) in their investment contracts.  Second, Rule 145 eliminates the presumption underwriter doctrine for all target shareholders taking stock in a stock swap acquisition if there are no shell companies involved.  Stock swap acquisitions in strategic acquisitions, for example, allow recipients of stock to sell everything they get immediately (as long as they are not controlling shareholders after the deal).  The rule also favors strategic buyers over buyout buyers in an auction, as the recipient shareholder in the buyout still are subject to resale restrictions.  These are major changes.  Again the SEC is tinkering with the private equity markets (always a worry) but a reduction of requirements here makes sense.   

Globalization and Prosperity

Amid the discussions about the detrimental effects of NAFTA on Ohio (see Dale's post on "Ohio's Economy" below), a soon-to-be published study of globalization's effects on the European Union states that "the European Commission estimates that at least a fifth of Europe’s income gains since World War II can be attributed to globalization, and that every EU household would gain over €5,000 annually if Europe seized the opportunities offered by the present phase of globalization." 

On the negative side, the report notes that, like Ohio, a number of workers have seen their jobs move out of the EU.  However, on the whole, incomes, wages, and the employment rate are all higher.  The report notes that semi-skilled, assembly jobs are moving to countries like China and India, while the EU has gained considerably in "knowledge economy" jobs.

The report also notes that a crucial determinant of whether a country will benefit from globalization is the sophistication of its "human capital"--EU countries with higher education levels and "strong innovation frameworks" are the big winners from globalization.  As Dale suggested below, if we apply these lessons to Ohio (and "Rust Belt" states generally), smarter investment in education and incentives for local talent to stay in the state would seem a better solution than renegotiating NAFTA.

Posted by: Paul Rose

London Again the Most Competitive Financial Center . . .

according to the third in a series of reports commissioned by--you guessed it--the City of London.  The rankings, which have New York second and Hong Kong a distant third, are based on surveys of professionals.  The surveys focus on 14 factors categorized into 5 key areas:

People involving “the availability of good personnel, the flexibility of the labour market, business education and the development of ‘human capital’.”

Business Environment covering “regulation, tax rates, levels of corruption, economic freedom and the ease of doing business.“

Market Access covering “the levels of securitisation, volume and value of trading in equities and bonds, as well as the clustering effect of having many firms involved in the financial services sector together in one centre.”

Infrastructure, focusing mainly on “the cost and availability of buildings and office space, although it also includes other infrastructure factors such as transport.”

General Competitiveness covering “the overall competitiveness of centres in terms of more general economic factors such as price levels, economic sentiment and how centres are perceived as places to live.”

NB: the rankings presumably were compiled before the announcement that the UK intends to crack down on favorable tax rules for non-domiciled foreign residents (non-doms).

Update:  Apparently, some of the responses to the survey came back before the tax changes were announced, "[b]ut the 411 replies since last September show New York with a big lead over London."

Posted by: Paul Rose