November 12, 2011
Ritter, Gao & Zhu on Decreasing IPOs
Jay R. Ritter, Xiaohui Gao & Zhongyan Zhu have posted “Where Have All the IPOs Gone?” on SSRN. Here is the abstract:
During 1980-2000, an average of 311 companies per year went public in the U.S. Since the technology bubble burst in 2000, the average has been only 102 initial public offerings (IPOs) per year, with the drop especially precipitous among small firms. Many have blamed the Sarbanes-Oxley Act of 2002 and the 2003 Global Settlement’s effects on analyst coverage for the decline in U.S. IPO activity. We offer an alternative explanation. We posit that the advantages of selling out to a larger organization, which can speed a product to market and realize economies of scope, have increased relative to the benefits of remaining as an independent firm. Consistent with this hypothesis, we document that there has been a decline in the profitability of small company IPOs, and that small company IPOs have provided public market investors with low returns throughout the last three decades. Venture capitalists have been increasingly exiting their investments with trade sales rather than IPOs, and an increasing fraction of firms that have gone public have been involved in acquisitions. Our analysis suggests that IPO volume will not return to the levels of the 1980s and 1990s even with regulatory changes.
Engler and Heyman on Contract Law
Mitchell L. Engler and have posted The Missing Elements of Contract Damages on SSRN with the following abstract:
In this article, we juxtapose two classic contract doctrines to expose a subtle, but dramatic, anomaly of damage law. The Jack Dempsey case heads one leading line of contract law. After Dempsey breached a contract to pursue another championship boxing match, the spurned promoter sued for his costs. The court limited the promoter’s recovery to costs incurred after the contract signing, thereby wiping out his pre-contract expenses. Separately, a promissory estoppel line of cases, headed by Red Owl, would allow promoters who never finalize a contract to recover their costs if reasonably incurred in reliance on a pre-contractual promise. While Dempsey and Red Owl have been independently analyzed at length, our linkage of them uncovers the striking possibility that an aggrieved party on a finalized contract might receive less than if he had failed to successfully negotiate the deal!
Beyond this first anomaly, our critical analysis of a Judge Posner opinion reveals a second unrecognized inconsistency. We show how an aggrieved party recovers pre-contract and fixed overhead costs on final contracts that provide in advance a fixed return, but not on those with variable or less certain returns. In other words, the aggrieved party of a contract without a fixed return, like the spurned Dempsey promoter, is treated worse than an aggrieved party of a set-return contract. Yet Judge Posner curiously defends the current law as providing - symmetrical results.
In response to the undercompensation problem, some scholars have proposed that the breaching party should be required to give all his gains from the breach to the aggrieved party. We utilize the movie Rocky to demonstrate why this disgorgement remedy goes too far. Suppose Dempsey had to breach a small fight contract to accept Gene Tunney’s unique offer to fight for the heavyweight championship. Why deprive Dempsey of all his hard-fought revenue regardless of the promoter’s harm?
Finally, we propose an innovative solution in lieu of disgorgement for contracts without a set return: a presumptive recovery of all costs plus a reasonable risky rate of return for the investment period. Our proposal essentially extends the well-established presumption that the aggrieved party can recover his post-contract costs when he does not seek recovery of his lost revenue. Our default presumption could be rebutted in litigation upon a proper showing of additional (or lesser) value by the aggrieved party (or the breaching party).
-- Eric C. Chaffee
In Search of the Grand Unified Theory of Economic Policy
The Wall Street Journal reports (here) that:
(1) More than three-quarters of the country says the nation's economic structure is out of balance and favors a very small proportion of the rich over the rest of the country. They say America needs to reduce the power of major banks and corporations, as well as end tax breaks for the affluent and corporations. Sixty percent say they strongly agree with such sentiments.
(2) 53% of the country believes—and 33% believe strongly—that the national debt and the size of government must be cut significantly, that regulations on business should be pared back, and that taxes shouldn't be raised on anybody.
While the WSJ story is entitled "Poll Finds Voters Deeply Torn," there is nothing necessarily contradictory in these two sets of goals. So, if anyone is looking for a winning platform for the upcoming election ....
November 11, 2011
The Value of IPOs
Businessweek says: Groupon, Beware: Of 25 Hot IPOs, 20 Tanked Later.
The New York Times Dealbook says: Bankers Reap Windfall in Groupon I.P.O..
And Carl Richards at the New York Times Bucks Blog concurs: Think Twice About That ‘Hot’ New I.P.O. Richards explains:
And in case there is any doubt, almost every study I can find on the performance of I.P.O.’s shows the same thing:
-- Looking at 1,006 I.P.O.’s that raised at least $20 million from 1988 to 1993, Jay Ritter, a University of Florida finance professor, showed that the median I.P.O. underperformed the Russell 3000 by 30 percent in the three years after going public. The same analysis showed that 46 percent of I.P.O.’s produced negative returns.
-- Another study focused on I.P.O.’s issued in 1993 and their performance through mid-October 1998. The average I.P.O. returned just one third as much as the S&P 500 Index. Over half traded below their offering price and one third went down more than 50 percent.
-- A study by what was then U.S. Bancorp Piper Jaffray looked at 4,900 I.P.O.’s from May 1988 to July 1998. By July 1998, less than one third of the new issues were above their initial offering. Even more startling, almost a third were no longer traded (that is, they went bankrupt, got acquired or were no longer traded on an active market).
-- Of 1,232 I.P.O.’s issued from 1988 to 1995, 25 percent closed on the first day of trading below the initial offer price. Adding insult to injury, “extra hot” I.P.O.’s, the ones that rose 60 percent or more on their opening day, performed the worst over the long term and underperformed the market by 2 to 3 percent a month during the next year.
So the math says it’s a bad idea — but we keep doing it. Maybe it is the word “hot” that gets us excited.
That, or maybe we're unduly influenced by companies like Morgan Stanley, Goldman Sachs and Credit Suisse. Those companies were the co-lead underwriters for Groupon's I.P.O., and they scored $29,120,000 in fees. The 14 underwriters collectively gained $42 million in fees from the offering. Nice work, if you can get it.
Crowdfunding and Securities Fraud
Thomas Hazen has just posted an article opposing a federal securities law exemption for crowdfunding. His paper, Crowdfunding, Social Networks, and the Securities Laws—The Inadvisability of a Specially Tailored Exemption Without Imposing Affirmative Disclosure Requirements, is available here.
Crowdfunding, as I have explained before, is the use of the Internet to raise funds through small donations from a large number of people. For more on the crowdfunding phenomenon, see one of my earlier posts here. For a detailed examination and an explanation of why I think small businesses should be able to sell securities through crowdfunding without registering their offerings. see my article, to be published in the Columbia Business Law Review this spring.
Hazen argues that a crowdfunding exemption would result in more securities fraud. I have explained how a crowdfunding exemption can be structured to reduce the risk of fraud. Hazen doesn't really discuss those ideas, but Hazen’s basic point is right. If the SEC or Congress creates a crowdfunding exemption, there will be more fraud. That conclusion, however, tells us nothing.
Allowing more securities offerings of any type—whether they are registered offerings, private offerings, or crowdfunded offerings—will result in more securities fraud and other investor losses. The only way to protect investors from securities fraud is to ban all sales of securities. We don’t do that because the other costs of such a policy would exceed the gains in fraud protection.
Unfortunately, Hazen stops at investor protection. Having concluded that there will be more fraud if we adopt a crowdfunding exemption, he doesn’t ask the important question: will the benefits of a crowdfunding exemption exceed its costs, including the possibility of additional fraud? I think the answer to that question is yes.
As I explain in my article, small businesses face a significant capital gap. The existing exemptions are simply too expensive for very small offerings, leaving very small startups with no effective outlet for capital. Hazen claims that the existing securities exemptions are sufficient. That may be true for larger businesses, but it clearly isn’t true for offerings by very small startups. Securities law is an impassable obstacle for many small businesses. The expense to comply with the existing exemptions is simply too great relative to the size of the offering.
A properly constructed crowdfunding exemption will make new sources of capital available to small startups, and I think that gain will outweigh the potential losses. Moreover, the risk to any particular investor is minimized by limiting the amount each investor may invest. On the whole, I think the benefit of the exemption will exceed its cost.
November 10, 2011
Stevens and Citizens United: Beyond the first 90 pages
What does John Paul Stevens, the author of the 90-page dissent in Citizens United, have to say about the case in his new memoir, Five Chiefs? Not much. Aside from a remark here and there, it seems Justice Stevens decided to let his dissent speak for itself. He framed his new memoir as an account of his experiences with five chief justices (Vinson, Warren, Burger, Rehnquist, Roberts), and it's a wonderful collection of observations and stories.
One of the few mentions of Citizens United comes when Justice Stevens discusses his arrival on the Burger Court, which he explains was when his new colleagues were busy drafting the opinion in Buckley v. Valeo. Although he didn't participate in that decision, he recalled: "my principal memory of my first weeks on the Court is one of extreme distaste for debates about campaign financing." He explained:
"That distaste never abated, and I have felt ever since that the Court would be best served by inserting itself into campaign finance debates with less frequency. That view may have had an impact on the unusually long dissent that I wrote during my last term on the Court against the Court's overreaching in the Citizens United case -- a case in which the Court essentially rewrote the law relating to campaign expenditures by for-profit corporations and unions in order to decide that a wealthy nonprofit corporation could use its assets to televise and promote a movie about Hillary Clinton wherever and whenever it wanted."
With a case description like that, it seems a little fire is still smoldering. But he doesn't give it expansive treatment and the overall tone of the book remains distinctly cordial.
The case briefly comes up again in a later chapter on Chief Justice Roberts, when Justice Stevens remarks that the chief justice's position in Citizens United prevents giving him a "passing grade in First Amendment law."
And, in a recent interview about the book (on NPR's Fresh Air with Terry Gross), Justice Stevens noted that narrower grounds for decision had been available in Citizens United, and remarked: "[t]he Court has held, I think incorrectly, that the First Amendment protects the right to use money just as though money were speech."
Work-Life Balance: Meditation & Music
A couple of recent articles in the Wall Street Journal caught my eye. The first, "Feeling Transcendent in 10 Minutes or Less," reviewed "a wave of classes … culling down the ancient tradition of meditation into fast and easy-to-follow lessons…. The simple exercises are typically 10-minutes long and are easy to fit into a hectic schedule." I have been meditating on-and-off for about 20 years and am both convinced that developing a meditation practice can be very beneficial, and that one of the biggest obstacles to doing so is the belief that only 30-minutes sitting cross-legged in an incense-filled temple will suffice. If you don't believe me, just close your eyes right now, sit up straight in your chair, and count 10 inhalations/exhalations (i.e., "in ... out ... 1"). I'd be surprised if you didn't feel just a little bit better after. And because nothing goes together like meditation and shameless self-promotion, you can find my edited collection of my Zen instructer's dharma talks here, as well as an accompanying photobook here (none of the author's make a penny on any of these books, we offer them all at cost). I have found the photobook to be particularly soothing in and of itself.
The second article, entitled "Cranking Up Your Private Pep Rally," notes that:
Stirring music may trigger a beneficial hormone boost in the brain .... Studies over the past decade have shown music is associated with a shift in dopamine levels .... Dopamine ... not only makes us feel good, it also helps improve concentration, say experts. The timely arrival of a favorite song can help a person's task-oriented frontal cortex to fire more efficiently and aid performance, says Daniel J. Levitin, a psychology professor at McGill University ....
Again, I am a firm believer in the beneficial power of music. In fact, sometimes I'll go through stretches where I don't listen to music for whatever reason, and when I get back to it I am amazed that I ever let myself go without it. Keith Jarrett's "Koln Concert" got me through more assignments in college than I can count. And today, few things help me keep things in perspective and remember to enjoy my life than House Music. What's your musical fix?
November 9, 2011
LSA Call for Papers and why it's never too early to plan your summer conference/vacation
Law and Society Association has an open call for papers for their annual meeting/conference, which will be held on June 5-8 in Honolulu, Hawaii. The theme of the meeting, Sociolegal Conversations across a Sea of Islands, offers little for corporate law scholars at first blush, but includes a few corporate law subtopics (as a big tent conference, papers, regardless of the tenuous connection, tend to get accepted):
- Regulation, including new forms of non-governmental and trans-national regulatory approaches and their relationship to traditional national regulatory mechanisms.
- Financial markets, trade, foreign investment, and the global impact of the financial crisis in a broad range of areas that are of interest to sociolegal scholars.
For the past two years that I have been attending this conference, it has been a great opportunity for me to connect with other corporate law scholars as there are always several strong corporate law panels. It is also a great way to jump start my research agenda for the summer and generate some post-grading enthusiasm for writing. If you are interested in presenting a paper at this conference and want to get placed on a corporate law panel, please send me an email by November 17th at firstname.lastname@example.org and include your name/contact and an abstract of your paper. I am collecting corporate law abstracts and then trying to organize panels out of the topics that people submit. The strength of the conference depends upon the participation of scholars like you, so please think about attending this year (and come on...it's in Hawaii...).
NFL, Supreme Court Share View on Message Control
The Wall Street Journal has an interesting article about a unique-angle NFL video coverage that is shared on a very limited basis. The video, known as "All-22," shows the whole field and every player. The angle thus allows viewers to see everything, from defensive and offensive alignments to each player's actions during a play.
The NFL apparently considered sharing the video (or otherwise selling it), but many football people objected to it. According to the article:
Charley Casserly, a former general manager who was a member of the NFL's competition committee, says he voted against releasing All-22 footage because he worried that if fans had access, it would open players and teams up to a level of criticism far beyond the current hum of talk radio. Casserly believed fans would jump to conclusions after watching one or two games in the All 22, without knowing the full story.
"I was concerned about misinformation being spread about players and coaches and their ability to do their job," he said. "It becomes a distraction that you have to deal with." Now an analyst for CBS, Casserly takes an hour-and-a-half train once a week to NFL Films headquarters in Mt. Laurel, N.J. just to watch the All-22 film.
I suppose he could be right that there could be more criticisms of coaches and players if the video were released, but I'm not convinced. And, more important, it appears that with the All-22 video, the criticisms would be more accurate than they are currently. In fact, the article gives an example of a TV producer with access to the All-22 video who explained how an in-game analyst was wrong to blame a player for being "late" on a play, because the player was doing his job in the defensive scheme. The play call was right to beat the defensive scheme, and the offense executed the play.
Certainly, there might be a learning curve. Fans would need to understand that players and coaches make mistakes in every game and that one or two plays may not be a fair representation of the body of their work. But that's already true today. For every player or coach who might take unfair criticism, the All-22 video is likely to exonerate another (or provide credit where credit was actually due).
In some ways, I suppose this is like the the question of whether video cameras should be allowed in the United States Supreme Court. After all, in that case, people would be provided access to something they don't fully understand, and it might lead to unfair criticism of the Justices, lawyers, and the legal system. Still, regardless of your view of cameras at the Supreme Court, there is one big difference here: football is a game; it is, at it's core, entertainment.
So, NFL, entertain us. Let's see the All-22.
November 7, 2011
The indirect political spending of the S&P 100
The Center for Political Accountability and Wharton’s Zicklin Center for Business Ethics recently released a report evaluating the political spending and disclosure practices of the S&P 100. They’ve come up with the “CPA-Zicklin Index” which evaluates factors such as disclosure of various categories of spending, whether the company has a policy on corporate political spending, and board oversight practices.
The big picture is that more companies seem to be restricting and disclosing certain political spending. The commentary I've seen to date mainly emphasizes this aspect of the report's findings (here, here, and here).
But what I find most interesting are the report’s numbers on indirect political spending policies and practices:
--“Seventy-five companies do not explicitly prohibit independent expenditures, or they leave open the possibility of such spending. Of these, 11 companies disclose their independent expenditures or say they will disclose if they engage in this spending. Sixty-four do not disclose details of their independent expenditures or are unclear in their policies.”
--Only 43 companies in the S&P 100 disclose information about their payments to trade associations and to other tax-exempt groups that were used for political purposes, and that information is incomplete.
--“Of the 53 companies that have a board committee oversee their corporate political spending, only 10 state on their websites that the committee also reviews the company’s indirect expenditures made through trade associations and other tax-exempt groups.”
In short, lots of large companies may be making independent expenditures, payments to trade associations or tax-exempt groups for political purposes, and little of it is disclosed.
This isn't exactly a surprise. We saw from the 2010 mid-term election that money from independent groups has soared. According to a report by the Campaign Finance Institute after the 2010 mid-term election, independent expenditures and electioneering communications by non-party groups increased 130% from 2008. Election law scholar Richard Hasen has an interesting new essay, which points out that 2012 will be the first presidential election since Watergate in which a significant portion of election money may be secret to the public, but not necessarily to the beneficiaries of the spending.
Are changes to corporate political spending meaningful without restrictions or disclosure of independent expenditures and payments to trade associations or tax-exempt groups?
Banking Fees and "the Market"
We often hear that the "market works" (and I happen to believe that, at least most of the time), but I think we often forget what that means. I've been thinking about this a lot in connection with some of the proposed bank fees, like those from Bank of America and other banks that have gotten a lot of press lately.
I have tried to bank with my college credit union and other small banks as I have moved around the country, and my current bank was a savings and loan that survived that crisis in the 1980s. They don't charge crazy fees, and they even reimburse all ATM fees from any bank when I use other machines. So I'm loyal to my small bank, and it's why I switched to them from my large bank when we moved here.
As Erik Gerding notes here, the idea that smaller banks or credit unions treat their customers better is not new. Ryan Bubb (NYU Law) and Alex Kaufman (Board of Governors of the Federal Reserve System (FRB)) have a paper that suggests credit unions do treat their customers better. At a presentation of the paper, Professor Gerding explains:
One of the questions I had then was why credit unions can't win customers by sending a credible signal that, to put it colloquially, "we'll screw you less." This Bank of America episode provides an interesting answer that perhaps customers are starting to recognize hidden fees and market choices.
My question is why people tolerate annoying banking practices at all. If literally all banks start charging high fees for debit cards and other transactions, of course there is no value in switching, and there is not consumer choice. But that has hardly been the case. There are options for smaller banks that provide many of the same services as big banks, often at better rates. Yet people have been reluctant to change in any significant way, at least until November 5th's Dump Your Bank Day.
Ultimately, the reason banks have continued to impose fees that seem like they would make people mad is because the banks have largely gotten away with it. It's one thing for people to complain about high fees. It's quite another for people to go to the trouble to change their direct deposit, automatic bill pay, and other banking services. When you push too far, though, the market will tell you, as Bank of America seems to be learning. Until then, the market doesn't really care, and that's why banks, cable companies, wireless companies, etc., act like they do: either we really do not have a choice or we don't really care that much (and the truth is, on a large scale, it's usually the latter). Even where choice is limited (like my cable tv market), we often fail to make choices when we can. And I have 48 movie channels I don't really need or want to prove it.
Poker as Sport
The World Series of Poker Main Event Final Table is underway.
There is an arena ... there are fans ... and they are rowdy.
Failed Law Firms and Unfinished Business Claims
The Wall Street Journal has an interesting article on efforts to collect the debts owed by failed law firms. According to the article, the bankrupt firm’s creditors are going after the new firms that the failing firm's attorneys join.
The basis of these claims is what’s known as the unfinished-business doctrine, the idea that the old firm’s creditors have an interest in profits generated by work that the attorneys began at the old firm and continue at their new firms. The unfinished-business doctrine is, in essence, an actual or constructive fraudulent conveyance claim. The trustee is arguing that the unfinished business, an asset of the bankrupt firm, was wrongfully conveyed to the new firm by the departing lawyer. Several law firms have apparently settled such claims.
I’m not a bankruptcy expert, so I wasn’t familiar with this idea, but it certainly puts a new spin on failing law firms. If you want to learn more, a short article from the New York Law Journal is available here.
November 6, 2011
Corporations B'ing good
I don't know about you, but I'm a sucker for videos of TED talks. I like TED talks about astrophysics, about how to tell when someone is lying, and about how leaders inspire action. Pretty much, I'll watch a TED talk on any subject.
So I was especially interested to find a TED talk about corporations. Specifically, I discovered a talk by Jay Coen Gilbert, a founder of B Lab, the nonprofit that certifies "B Corporations." The talk gives a quick overview of what they do, peppered with phrases like "conscious capitalism" and "using business as a tool for social change."
I recently met another B Lab founder at a corporate law roundtable and got a chance to hear more in person about this new kind of corporation. At this early stage, I find myself simultaneously intrigued and somewhat skeptical of the project.
Here's the gist. The "B" in "B Corp" stands for "Benefit." The idea is that the legal structure of the B Corp requires decisions that are good for society, not just shareholders; it empowers companies making operating and liquidity decisions to consider employees, other stakeholders, and the environment in addition to shareholder value.
So far Maryland, Vermont, California, Hawaii, Virginia, and New Jersey have passed B Corp legislation. Other states considering the legislation include Colorado, New York, North Carolina, Pennsylvania, and Michigan.
B Lab, a nonprofit, certifies B Corps -- kind of like the certification of a "fair trade" cup of coffee -- with the idea that consumers will be better able to discern between companies that use marketing to look good and companies that are actually doing good things. More broadly, it seems the hope is that this will help socially and environmentally conscious folks to buy products and invest in companies which align with their values.
The standards for this third party certification are focused on social and environmental actions, accountability, and transparency. Currently there are more than 450 certified B Corps. I've never heard of most of them, but from shopping for things like "green" household products and hipster eyeglasses, I'm familiar with some of them like Method Products, Seventh Generation, Dansko, Peeled Snacks, Warby Parker, and Numi Organic Tea.
The B Corp seems to be part of the evolution of corporate social responsibility, and it's certainly timely with the public outcry for corporate change. But I wonder if the existence of a separate type of corporation somehow suggests that other corporations shouldn't or couldn't also engage in similar socially and environmentally conscious practices. This is a development I'll continue to follow with interest.
Another Step to Blogging-As-Scholarship Legitimacy
"The Post: Good Scholarship from the Internet." (HT: Josh Wright.)