Business Law Prof Blog

Is a repeal of Dodd-Frank looming?

In a recent radio address, President Obama warned that:

[T]op Republicans in Congress are now beating the drum to repeal all of these reforms and consumer protections. Recently, one of the Republican leaders in the Senate said that if Republicans take charge of Congress, repeal would be one of the first orders of business. And he joins the top Republican in the House who actually called for the law to be repealed even before it passed.

The Republican radio address of Senator John Thune did nothing to dispel this notion, asserting that Democrats "spent their time passing more and more burdensome regulations, like their so-called Financial Reform bill that failed to address the main cause of our economic mess."

I wonder how many readers of this blog are now tempted to vote for the Democrats just so all that time spent digging through the pages and pages that is Dodd-Frank won't have been in vain.

You can find the text of the two radio addresses here.

SJP

Office Depot "Talks Down" Analysts' Estimates, SEC "Talks Up" $1 Million Fine

The SEC announced enforcement actions yesterday against two Office Depot executives and the company. The SEC alleges that the executives made selective calls to certain analysts to indicate the company would not meet analysts' earnings estimates, although it was not directly stated that earnings would not meet expectations.  The company never issued a broad public disclosure of this information, as would be required under Regulation FD if the disclosures to the analysts were material nonpublic information. 

According to the SEC order against the company (pdf here), the talking points used for the calls were as follows:

• Haven’t spoken in a while, just want to touch base. 
• At beg. of Qtr we’ve talked about a number of head winds that we were facing this quarter including a softening economy, especially at small end. 
• I think the earnings release we have seen from the likes of [Company A], [Company B], and [Company C] have been interesting. 
  • On a sequential basis, [Company A] and [Company B] domestic comps were down substantially over prior quarters. 
  • [Company C] mentioned economic conditions as a reason for their slowed growth. 
• Some have pointed to better conditions in the second half of the year – however who knows? 
• Remind you that economic model contemplates stable economic conditions – that is midteens growth

Apparently, Office Depot did not make such calls to analysts on a regular basis, which made the calls especially suspect.  According to the order, "Word of these calls quickly spread among analysts, some of whom believed that Office Depot was 'talking down' analysts’ earnings estimates." 

I suspect the SEC is correct about the motivation for the calls, so perhaps this the right outcome. But I can't help but wonder if the market might not work more efficiently with a little gentle foreshadowing. This is hardly a bombshell call to analysts, so if these calls were material, they were not that material.  The SEC itself seems to agree that not all analysts thought this call was about talking down earnings. 

And, after all, the Federal Reserve often "hints" at future actions to help stabilize the market. Obviously, the Fed actions are at a macro level and Office Depot is at a micro level, but I think there is at least an argument such actions can work toward the same (arguably positive) end at either level.  

--Joshua Fershee

Why do so many physicists love poker?

I've blogged previously about Wall Street & poker, as well as lawyers & poker.  Now, Discover magazine has an interesting article out about physicists & poker.  And to think, according to many legislators and judges all these smart people are just throwing their money away because poker is predominantly a game of chance.

SJP

British Takeover Panel Says It's "Too Easy for 'Hostile' Offerors"

The New York Times DealBook reports the the British Takeover Panel is planning to amend its Takeover Code (pdf statement here) to make it harder for hostile offerors to takeover a company. The panel explained that offers can destabilize the company and that the bid outcome is “influenced unduly by the actions of so-called short-term investors.”  

The Takeover Code 

is designed principally to ensure that shareholders are treated fairly and are not denied an opportunity to decide on the merits of a takeover and that shareholders of the same class are afforded equivalent treatment by an offeror. The Code also provides an orderly framework within which takeovers are conducted. In addition, it is designed to promote, in conjunction with other regulatory regimes, the integrity of the financial markets. 

The Code is not concerned with the financial or commercial advantages or disadvantages of a takeover. These are matters for the company and its shareholders. Nor is the Code concerned with those issues, such as competition policy, which are the responsibility of government and other bodies.

One of the flaws the panel cites in the current system is that bidders bypass the board and go directly to the shareholders.  To address these (and other) concerns, the Times reports: 

The measures the panel says it plans to adopt include shortening the period between when an approach is announced and a firm offer is received, requiring more complete disclosure on the part of both companies, giving more voice to employees and introducing more transparency in reporting fees tied to deals. 

At least some of these proposals don't seem to align directly with the statement of the Code's purposes. At first glance, for example, I can't help but note that talking to employees sounds like a stakeholder protection, not a company or shareholder protection, although I concede there is often value in knowing what the employees think. 

Furthermore, I am not sure what to think of the entire proposal. On the one hand, I tend to think that companies are often being managed with the short-term stock price in mind -- to the point that sometimes it appears management is running the company to keep the day-traders happy.  (To be clear, I think that's bad.)

On the other hand, more offers can make a company more accountable to the shareholders. If shareholders are willing to sell at a given price, then they should have the option if there is a willing buyer. If most of the shareholders think that current management is better for the long term they won't sell.  Sure, short-term sellers may be looking to cash in quickly, but that's true anyway.  We can't make it so that all shareholder have the same interests no matter what regulations are put in place.

Ultimately, the Takeover Panel thinks that power has shifted to provide the offering group a tactical advantage over the target company.  Perhaps they are right, but I'm still a little skeptical. At first glance, anyway, this seems like one of those places where shareholders already have the power they need, they just aren't exercising it to the liking of the panel.  I'm not sure that's the right motivation for changes in the rules.

--Joshua Fershee

 

 

Time to Act?

The past two years have seen a remarkable increase in both the power and influence of the Federal Reserve.  And yet, the agency's authority may need to grow more.

Over the weekend, Economist Martin Feldstein stated that there are currently 4 1/2 million homes in foreclosure or at least 90  days in arrears.  Meanwhile, the Federal Open Market Committee (which largely establishes the nation's monetary policy) appears undecided as to the extent of federal intervention required; and to one extent or another, the press seems transfixed by the spectacular ineffectiveness of the stimulus to spur spending.  See "The X Factor of Economic: People" (NYT 10/16/10).

Against the backdrop of this soul-searching and philosophical debate, Professor Tim Canova of Chapman Law School has contributed a thoughtful analysis of the Fed's actions in the past few years and its active role during a prior period of crisis.  See "The Federal Reserve We Need," available at  http://www.prospect.org/cs/current_issue .

---JSC, 10/19/10       

Harrah's Bets Lack of Control Won't Impact IPO

The casino company Harrah's Entertainment is filing to sell shares in an initial public offering. The company went private in 2006 in a $27 billion deal, but is now looking to raise funds for "growth projects" and other "corporate purposes."  

Harrah's states that they don't expect to pay dividends, and that the company is controlled by entities with interests that may differ from those of their stockholders. In addition, one of the risk factors in their S-1 (here) explains the impact of being a "controlled company":

We will be a “controlled company” within the meaning of the New York Stock Exchange and Nasdaq rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements.

Upon the closing of this offering and the IPO, Hamlet Holdings will continue to control a majority of our voting common stock. As a result, we will be a “controlled company” within the meaning of the New York Stock Exchange and Nasdaq corporate governance standards. Under the New York Stock Exchange and Nasdaq rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain New York Stock Exchange and Nasdaq corporate governance requirements, including:   

• the requirement that a majority of the Board of Directors consists of independent directors;
• the requirement that we have a nominating/corporate governance committee that is composed entirely of independent directors;
• the requirement that we have a compensation committee that is composed entirely of independent directors; and
• the requirement for an annual performance evaluation of the nominating/corporate governance and compensation committees.

Following this offering and the IPO, we intend to utilize these exemptions. As a result, we will not have a majority of independent directors nor will our nominating/corporate governance and compensation committees consist entirely of independent directors and we will not be required to have an annual performance evaluation of the nominating/corporate governance and compensation committees. See “Management.” Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the New York Stock Exchange or Nasdaq corporate governance requirements.

When you see it written like this, it sure seems like an investor is giving up a lot of protections available with other investment opportunities.  On the other hand, the value of these protections should be built in the the share price.  Presumably, Harrah's doesn't view this is a major hurdle to the success of the IPO (i.e., it won't lower the value of the stock very much). Odds are that's a safe bet, which raises the question: do these protections actually mean anything to investors at the time of purchase? 

--Joshua Fershee

"Capitalist" or "Socialist"? It depends. And I reserve the right to change my mind.

Jonathan Haidt penned an essay for yesterday's WSJ entitled "What the Tea Partiers Really Want," wherein he argues that: "The passion behind the populist insurgency is less about liberty than a particularly American idea of karma."  I found it to be an interesting read, but what jumped out at me was the oft-repeated refrain: "Everyone should be free to do as they choose, so long as they don't infringe upon the equal freedom of others."  I've always thought this is somewhat of an empty proposition because two people can agree perfectly on it in principle while disagreeing widely as to what constitutes "infring[ing] upon the equal freedom of others."

Take for example the protection of personal property, a foundational element of capitalist society.  One could view the distribution of property to be primarily a function of circumstance rather than some type of scorecard for who "deserves" to call what property "mine."  For example, I could look at my life and conclude that I have managed to accumulate enough property to call myself a success according to some set of generally accepted metrics.  However, when I try to identify the personal attributes that justify my ownership, I may ultimately conclude that I have primarily "nature and nurture" to thank.  That is, I never chose, in any meaningful sense, the personal attributes most likely associated with my success such as intelligence, drive, wisdom, passion, etc.  These were all either given to me at birth or developed by others/circumstances (E.g., my mom surrounding me with books and music as I grew up--thanks, Mom!).  If that is correct, and we also assume a limited amount of property to be distributed, then my asserting a right to exclude others from partaking in some part of "my" property is arguably infringing upon their equal freedom to enjoy what would otherwise be a more equal distribution of property.  In sum, I have never found defenses of expansive interpretations of personal property rights based on notions of "I earned it" to be particularly convincing.  (I realize I'm ultimately taking on the entire concept of free will here, but at least I have cause-and-effect on my side.  Beyond that, I'll just have to leave that discussion for some later date . . . or lifetime, given how busy I am.)

Having said that, what I do find compelling are utilitarian and similar arguments.  That is to say, one could well agree with my foregoing assessment of justice and fairness yet nevertheless conclude that a system protective of expansive private property rights is best (or least worst) because it maximizes, for example, overall well-being.  However, if you are going to ask me to give some quarter in terms of my beliefs about justice and fairness on that basis, you'll likely need to do more than plop the "Bible of Unbridled Faith in Free Markets" on my desk, or offer up some cost-benefit analysis rooted in assumptions of perfect human actor rationality and commonly held assessments of value.  Empirical studies obviously advance the ball further, but even then one need only spend a little time with empiricists to realize that the seemingly few times they progress beyond arguing about study design they seem to rarely be able to get beyond arguing about implications.  (I'm obviously exaggerating here, but I hope you take my point.)

So, have I painted myself in a corner here?  Are my assertions of open-mindedness just hot air?  I certainly hope not.  And I believe those who know me would agree that I'm more open to what are generally deemed to be conservative or classically liberal positions than I was even a year ago.  (I guess one can only read ProfessorBainbridge.com and Truth on the Market on a semi-regular basis so long before becoming at least somewhat brainwashed ... errr, influenced by the assertions commonly put forward on those sites.)  I can certainly confess that I'm just about one more billion dollar IOU away from switching my political identification from Democrat to Independent, and I say that as someone who strongly believes the bailout--or at least some meaningful portion of it--was necessary to avoid a repeat of 1929.

Anyway, if you've made it this far you probably deserve some sort of prize, and you're also likely thinking something along the lines of: "Duh!"; "Huh?"; or, "So what?"  To this my likely best reply is that I just needed to vent, and I remain--as is often the case--at least somewhat vulnerable to the criticisms launched by Will (Matt Damon) against the Harvard grad student Clark in the movie "Good Will Hunting."  Proceed past the jump if you're not sure what I'm talking about.

Clark: There's no problem. I was just hoping you could give me some insight into the evolution of the market economy in the early colonies. My contention is that prior to the Revolutionary War the economic modalities, especially of the southern colonies could most aptly be characterized as agrarian pre-capitalist and...

Will: [interrupting] Of course that's your contention. You're a first year grad student. You just got finished reading some Marxian historian, Pete Garrison prob’ly, you’re gonna be convinced of that until next month when you get to James Lemon, then you’re gonna be talkin’ about how the economies of Virginia and Pennsylvania were entrepreneurial and capitalist back in 1740. That's gonna last until next year, when you’re gonna be in here regurgitating Gordon Wood, talkin’ about you know, the Pre-revolutionary utopia and the capital-forming effects of military mobilization.

Clark: [taken aback] Well, as a matter of fact, I won't, because Wood drastically underestimates the impact of--

Will: ..."Wood drastically underestimates the impact of social distinctions predicated upon wealth, especially inherited wealth..." You got that from "Work in Essex County," Page 98, right? Yeah I read that too. Were you gonna plagiarize the whole thing for us- you have any thoughts of- of your own on this matter? Or do- is that your thing, you come into a bar, you read some obscure passage and then you pretend- you pawn it off as your own- your own idea just to impress some girls? Embarrass my friend?

[Clark is stunned]

Will: See the sad thing about a guy like you, is in about 50 years you’re gonna start doin' some thinkin' on your own and you’re gonna come up with the fact that there are two certainties in life. One, don't do that. And two, you dropped a hundred and fifty grand on a [freakin'] education you coulda' got for a dollar fifty in late charges at the Public Library.

SJP