Thursday, April 28, 2016
Hello, everyone - I'm passing this along in case any of our readers have an interest, or know anyone who might have an interest. And if anyone needs convincing as to why they should spend a semester or a year in New Orleans, email me privately and allow me to extol the city's virtues.
Tulane Law School is currently accepting applications for a visiting tax professor for either the Fall of 2016 or for the entire 2016-2017 Academic Year. Visitors would be expected to teach basic Income Tax and other tax related courses. Applicants at any career stage are encouraged. To apply, please submit a CV along with a statement of interest and any supporting documentation. Applications and questions may be directed to Vice Dean Ronald J. Scalise Jr. at email@example.com. Tulane University is an equal opportunity/affirmative action employer committed to excellence through diversity. All eligible candidates are invited to apply.
Saturday, April 23, 2016
I wanted to drop a quick plug for the latest addition to the blawgosphere: The Surly Subgroup: Tax Blogging on a Consolidated Basis. My colleague, Shu-Yi Oei, is one of the founding members, and they've put together a really nice group of professors with a variety of interests who will post about a range of tax-related issues. They just went live this week, but already there are a couple of posts up that may be of interest to BLPB readers, including one on the new regulations for Uber and Lyft drivers in San Francisco, one on whether organizations that distribute marijuana are eligible for charitable organization status for tax purposes, one on Donald Trump's tax proposals, and one on Prince's tax dispute with the French government.
If you're like me, you have no idea what the phrase "Surly Subgroup" means. No matter; Shu-Yi's helpfully posted an explanation here. Basically, affiliated corporate groups may file a consolidated tax return, raising questions about the extent to which losses in one can offset the income of another. "Separate Return Limitation Year" (SRLY) rules govern that question for corporations that have losses prior to their affiliation with the group. And those rules allow the "subgrouping" of corporations that were affiliated with each other prior to joining the larger group - hence, SRLY subgroups.
Saturday, April 16, 2016
A few days ago, the Eighth Circuit became the first appellate court to interpret Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (Halliburton II), relying on that case to reverse a district court’s class certification order in IBEW Local 98 Pension Fund v. Best Buy Co.
The case is interesting because it has an unusually clean fact pattern for analyzing some basic dilemmas in the law governing Section 10(b) actions.
The facts are these:
On the morning of September 14, 2010, before the market opened, Best Buy issued a press release that increased its full-year earnings guidance. By the time of the opening, its stock price was up 7.5% from the prior day’s close. Two hours after the press release issued, Best Buy held a conference call with market analysts, during which the CFO stated that the company was “on track to deliver and exceed” its EPS guidance.
On December 14, 2010, Best Buy issued a press release announcing a decline in sales and reduction in EPS guidance, causing a stock price decline.
The plaintiffs alleged that both the September 14 press release, and the subsequent conference call, were fraudulent. The district court held that the press release was immunized as a forward-looking statement, accompanied by sufficient cautionary language, under the PSLRA’s safe harbor. However, the court held that the “on track” representation was not forward looking, and claims based on that statement could proceed.
The problem, however, as the plaintiffs’ own expert eventually opined, was that Best Buy’s stock price increased after the immunized press release, and did not appear to react to the earnings conference call. The plaintiffs’ expert also opined that the conference call conveyed information that was “virtually the same” as the information in the press release.
The plaintiffs offered two theories to explain how the conference call may have impacted Best Buy’s stock price. First, they claimed that the conference call caused an upward earnings drift over the next several weeks. And second, they claimed that the “on track” confirmatory statements served to maintain Best Buy's stock price, already boosted by the press release. Accepting this evidence, the district court certified the class.
On appeal, the Eighth Circuit reversed. It concluded that, in accordance with Halliburton II, the defendants had rebutted the presumption that the conference call impacted Best Buy's price. In the Eighth Circuit’s view, because the plaintiffs' own expert agreed that the stock price had only increased in response to the immunized press release, and agreed the conference call conveyed no new information, the conference call could not have had an effect. The court rejected the "earnings drift" theory as contrary to the efficient market hypothesis, but did not – in explicit terms – weigh in on the plaintiffs’ price maintenance theory, except to say that this was unlike situations where a third-party confirms an earlier corporate statement.
Judge Murphy, in dissent, faulted the majority for failing to directly confront the plaintiffs’ price maintenance theory – which, she believed, had not been rebutted.
There are several interesting things to comment on here.
[More under the jump]
Thursday, April 14, 2016
Today in my Business and Human Rights class I thought about Ann's recent post where she noted that socially responsible investor Calpers was rethinking its decision to divest from tobacco stocks. My class has recently been discussing the human rights impacts of mega sporting events and whether companies such as Rio Tinto (the medal makers), Omega (the time keepers), Coca Cola (sponsor), McDonalds (sponsor), FIFA (a nonprofit that runs worldwide soccer) and the International Olympic Committee (another corporation) are in any way complicit with state actions including the displacement of indigenous peoples in Brazil, the use of slavery in Qatar, human trafficking, and environmental degradation. I asked my students the tough question of whether they would stop eating McDonalds food or wearing Nike shoes because they were sponsors of these events. I required them to consider a number of factors to decide whether corporate sponsors should continue their relationships with FIFA and the IOC. I also asked whether the US should refuse to send athletes to compete in countries with significant human rights violations.
Because we are in Miami, we also discussed the topic du jour, Carnival Cruise line's controversial decision to follow Cuban law, which prohibits certain Cuban-born citizens from traveling back to Cuba on sea vessels, while permitting them to return to the island by air. Here in Miami, this is big news with the Mayor calling it a human rights violation by Carnival, a County contractor. A class action lawsuit has been filed seeking injunctive relief. This afternoon, Secretary of State John Kerry weighed in saying Carnival should not discriminate and calling upon Cuba to change its rules.
So back to Ann's post. In an informal poll in which I told all students to assume they would cruise, only one of my Business and Human Rights students said they would definitely boycott Carnival because of its compliance with Cuban law. Many, who are foreign born, saw it as an issue of sovereignty of a foreign government. About 25% of my Civil Procedure students would boycott (note that more of them are of Cuban descent, but many of the non-Cuban students would also boycott). These numbers didn't surprise me because as I have written before, I think that consumers focus on convenience, price, and quality- or in this case, whether they really like the cruise itinerary rather than the ethics of the product or service.
Tomorrow morning (Friday), I will be speaking on a panel with Jennifer Diaz of Diaz Trade Law, two members of the US government, and Cortney Morgan of Husch Blackwell discussing Cuba at the ABA International Law Section Spring Meeting in New York. If you're at the meeting and you read this before 9 am, pass by our session because I will be polling our audience members too. And stay tuned to the Cuba issue. I'm not sure that the Carnival case will disprove my thesis about the ineffectiveness of consumer pressure because if the Secretary of State has weighed in and the Communist Party of Cuba is already meeting next week, it's possible that change could happen that gets Carnival off the hook and the consumer clamor may have just been background noise. In the meantime, Carnival declared a 17% dividend hike earlier today and its stock was only down 11 cents in the midst of this public relations imbroglio. Notably, after hours, the stock was trading up.
April 14, 2016 in Ann Lipton, Conferences, Corporate Governance, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Human Rights, International Law, Law School, Marcia Narine, Teaching | Permalink | Comments (0)
Saturday, April 9, 2016
Institutional investors – often in response to some protest – occasionally choose to divest themselves of investment in industries that they believe are doing some social harm.
And Marcia here at BLPB has argued that investors (like consumers) are rarely sufficiently committed to these causes – she doubts that “name and shame” policies, which are intended in part to encourage such moves, will have much of an effect in light of investors’ greater desire for return.
Well, here’s one new datapoint: Calpers is revisiting its policy of refusing to invest in tobacco stocks. Apparently, its moral commitments can’t quite hold up in the face of the industry’s rising share prices. Calpers’s official position is apparently that it can do more good by “engaging” rather than by walking away, although when it comes to tobacco – a product that many criticize merely for its existence – it’s hard to see exactly how that happens.
Saturday, April 2, 2016
A while back, I posted about a new split between the Second and Ninth Circuits regarding the ability of plaintiffs to bring a Section 10(b) action based on a failure to disclose required information, even in the absence of allegations that the omitted information rendered the remaining statements misleading. The Second Circuit is for; the Ninth is against.
At the time, the split was not well-developed; the Second Circuit allowed for the possibility of such claims, but also held that the case before it failed to allege scienter. And the last time the Second Circuit had allowed similar claims to go forward was in In re Scholastic Corp. Sec. Litig., 252 F.3d 63 (2d Cir. 2001).
So it wasn’t clear whether the split would have much practical effect.
Well, the Second Circuit now found a case where scienter was properly alleged – and it reversed a district court’s dismissal of the complaint. The opinion is a veritable goldmine of interesting nuggets.
[More under the jump]
Saturday, March 26, 2016
Lately I've been thinking about CLE programs. I no longer am required to take them (thank goodness) but they were a regular feature in my life when I was practicing. I'm only familiar with New York's requirement, but I assume other states' programs are not terribly dissimilar. I'm sorry to say that I generally found CLE requirements to be a thundering waste of my time - not to mention the fees for classes that functioned as a waste of my firm's money. I realize there's been a decades-long debate about this issue, but I'll throw my hat in and speculate whether there's anything that could be done to improve them.
My first problem with CLE - and this I gather has always been the complaint - is that the classes were generally of no use to me in my practice. I was a specialist; almost all of my time was spent on securities litigation, with the occasional sprinkling of corporate. That meant I lived the latest case law and proposed legislation/rulemaking on a day to day basis. The majority of CLE programs in the area were simply pitched at a level that was far too introductory for me - if I actually needed, say, an hourlong course on the latest Supreme Court decisions in the field, that would have been a flashing red light that I was committing malpractice on a day to day basis.
Aware of this, I sometimes selected CLE programs that were outside my field: electronic privacy, IP, employment, antitrust. And these were interesting, and new to me - but they were also entirely irrelevant to my work.
My other problem with CLE - and this is perhaps a new complaint - was, frankly, the political bias. I was a plaintiff-side litigator in a highly politicized area of law. I found that, at least in my area, CLE programs tended to consist mostly, if not entirely, of defense-side speakers (sometimes with a smattering of government). As a result, I found most of the discussions to be heavily slanted in the defense's favor, both in terms of their interpretation of existing law, and their recommendations and commentary. This wasn't always true, of course, but it was true enough on a regular basis to be frustrating. The occasional panel with one plaintiff-side attorney was rarely enough to counter what was an overwhelmingly defense-side spin. I used to fear that to the extent some lawyers found these programs novel, they were receiving a very distorted picture of the law - one that they would then carry through to their own practice.
I imagine there are a lot of entrenched interests in maintaining the current system, but I wonder if there might be some ways to make the CLE requirement more meaningful.
First, I'd propose a some option of self-certification, whereby attorneys with a certain number of years of experience, who attest that they specialize in a particular field, are able to fulfill the requirement by certifying that they have read/studied a specified amount recent legal developments in their area of practice - caselaw, new regulations, new publications and updates, etc.
Second, I'd propose a balance requirement. At least for fields where attorneys tend to specialize on one side of the "v," any program featuring more than one speaker would be required to devote 50/50 time, or 60/40 time, or even 70/30 time, to each side.
I imagine that there are a zillion reasons why these proposals are impractical and unlikely to be adopted, and I know these issues have been discussed in various fora before, but it seems to me they can't render the requirement any less useful than it is now.
I'd be curious to know how others experience CLE. Am I too harsh in my assessment? Do others get more out of it than I did?
Saturday, March 19, 2016
On Thursday and Friday, I attended Tulane’s 28th Annual Corporate Law Institute. I’d never had the chance to go before, but now that I’m a member of the faculty, it’s a fabulous perk of the job. It was marvelous to get expert, practical analysis of the most pressing issues in corporate governance and M&A practice. I was also delighted to see a couple of my students in attendance – during one of the breaks, they told me how the speakers helped bring together the reality behind the theories they learned in their business courses (and, having never heard Chief Justice Leo Strine speak before, they were predictably … ahem … amazed by his comments).
I’ve compiled a (very) incomplete list of the particular remarks that struck me as interesting or enlightening – with a heavy disclaimer that I wasn’t able to take notes on everything, so this should not be viewed as representative of the conference as a whole. It’s more like, Things From Some Panels Ann Lipton Was Able to Jot Down Quickly. (And also it’s possible I misheard some comments – if so, I apologize!).
I’ll note that the orientation of the speakers was almost all defense-side practice – defending from lawsuits, and defending from activist investors – which made it all the more valuable and interesting when someone spoke up from the other side of the table, or even from a more centrist point of view (the SEC, ISS, M&A journalists, Strine, and Chancellor Andre Bouchard).
[More under the jump]
Saturday, March 12, 2016
I’ve become interested in the proposal to require auditing firms to disclose the names of engagement partners, and other firms, involved in an audit of a public company. Though I can’t pretend to have waded through all the comments that have been submitted on this issue, I gather one of the concerns is that disclosure will increase potential liability under Section 10(b). I actually think that it will and it won’t, and as someone who feels that auditors should be held to more stringent standards than the law currently allows, I have mixed feelings about the proposal.
[More under the jump]
Saturday, March 5, 2016
The Wall Street Journal reports on a growing phenomenon – in the wake of cases like RBC Capital Mkts., LLC v. Jervis, 2015 Del. LEXIS 629 (Del. Nov. 30, 2015), corporate boards considering M&A deals are rooting out investment banking conflicts by turning to smaller boutique firms to advise them.
My off the cuff reactions -
First, I find this notable if only because board directors are shielded from personal liability both by exculpatory clauses in corporate charters, and by D&O insurance. Scholars frequently argue that the lack of personal liability blunts the potential deterrent effects of shareholder lawsuits; I am fascinated to see a real-world demonstration that the lawsuit threat remains potent. It’s particularly striking in this instance because ultimately it is the conflicted banks – not the directors – who risk liability, and yet the directors are the ones who are exhibiting concern. This is a salutary result: the directors, of course, are the ones who have a fiduciary duty to protect shareholders. (But cf. Andrew F. Tuch, Banker Loyalty in Mergers and Acquisitions) But it’s not necessarily what one would have expected given the liability regime. The WSJ piece suggests that boards’ concerns stem from their fears that their corporations will be responsible for the banks’ legal fees, but I wonder if it’s more that lawsuits, especially ones that appear meritorious, really do have a shaming effect that shouldn’t be underestimated.
Second, to avoid conflicts, directors are hiring smaller, boutique advisory firms. In the post Dodd Frank world, many have questioned whether large mega banks are financially viable, and have suggested that breakups may be inevitable; chalk this up as another datapoint.
Finally, though, it's worth pointing out that there is a legitimate question about how much shareholders will ultimately benefit. To the extent boutique firms are hired as secondary advisors to work with larger banks, is there a risk that the additional fees will cancel out any cost savings? And of course, there’s the standard argument that large banks' connections and knowledge of industry is a benefit to their clients. We’ve seen this argument before – everywhere from the “revolving door” to independent directors to industry arbitrators to farcical questions about whether Supreme Court nominees have an opinion on Roe v. Wade – and it comes down to the claim that a loss of objectivity is the price of expertise. The problem is, it’s still not clear where the right balance lies.
Saturday, February 27, 2016
Monday, February 22, 2016
"Why don't conservative activists use SEC Rule 14a-8 (the so-called shareholder proposal rule) to put proposals on corporate proxy statements?" and speculates that to the extent conservatives do submit such proposals, they are likely to be excluded as ordinary business matters.
Well, I don't know if this represents a new trend or anything, but at least one conservative group was recently successful under 14a-8. The National Center for Public Policy Research submitted a proposal to have Deere & Co provide a yearly report to stockholders on whether its political spending was in line with the company's stated values. According to the proposal, Deere & Co has stated that it advocates for a free marketplace, and that it only supports candidates who share its "pro-business" outlook and commitment to "free enterprise," but at the same time, it has joined the Climate Action Partnership, withdrawn its support for the conservative ALEC, and has donated to politicians who voted for the Affordable Care Act and Dodd-Frank. The proposal asks that the Board develop a policy for ensuring congruency between the company's corporate values and its political activity, and report to shareholders on the company's compliance with that policy.
The SEC denied Deere & Co's request for no-action relief in December, and the proposal has been included in the corporate proxy for Wednesday's shareholder meeting.
Saturday, February 20, 2016
A couple of days ago, the SEC announced that it had filed a settled administrative action against former Deutsche Bank research analyst Charles Grom. The administrative order is interesting because it gives a little glimpse into the lives of sell-side research analysts in the wake of early 2000s reforms. It also serves as an object lesson in the failures of attempts to “level the playing field” regarding access to inside information.
[More under the cut]
Saturday, February 13, 2016
In recent years, and particularly since the Supreme Court’s decision in Citizens United v. FEC, 558 U.S. 310 (2010), there have been increasing calls for the SEC to require public companies to disclose their spending on political activities.
The situation is complex because while there may be many reasons for transparency on the subject, it is difficult to tie disclosure specifically to the needs of investors as investors. Most political spending is likely undertaken by companies to benefit the firm itself – that is, in fact, precisely why people find it objectionable – and it is difficult to articulate why investors as investors (rather than, say, as employees or as citizens) should care about political spending any more than any other ordinary business decision for which we have no required disclosures.
The SEC has resisted increasingly loud calls that it regulate in this area, likely due to this precise problem. In December, Congress passed a budget that actually forbade the SEC from using funds to regulate political spending in the following year, though that has not ended the matter for Democrats. (Interestingly, I note that it was only after the budget had passed both Houses that there started to be any real press on the subject and the issue still didn't get much press traction until after the budget was signed into law. I’m no political expert but if I had to guess, I’d say that the reason for the relative stealth was that the SEC supported the measure as a way of alleviating some of the political pressure on itself).
In any event, over the years, there have been a variety of attempts to show that political spending is/is not beneficial to investors, often with a view toward providing a solid foundation for SEC regulation. One study, Corporate Lobbying and Fraud Detection by Frank Yu and Xiaoyun Yu, found that political activity – namely, lobbying – helps firms conceal fraud. Based on class actions filed between 1998 and 2004, and class period length, they concluded that firms that engage in political lobbying managed to keep their fraud under wraps for longer periods than non-lobbying firms. They also found that lobbying expenses increased during fraud periods.
Which is why I read with interest a new study by Matthew McCarten, Ivan Diaz-Rainey, and Helen Roberts that extends Yu and Yu’s original research. According to the authors, the Sarbanes Oxley Act has significantly mitigated the impact of lobbying. They find that post-SOX, lobbying is no longer correlated with longer class periods/fraud detection; they attribute the change, at least in part, to various SOX corporate governance provisions, such as the requirement that the CEO and CFO certify SEC filings, and increased whistleblower protection.
These results are intriguing, though I have some reservations. The authors treat any action filed in 2005 or later as post-SOX (to account for delays in SOX’s implementation since its passage in 2002). But this was also a period of great upheaval in securities class actions. In 2005, the Supreme Court decided Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, which introduced loss causation as a new and heavily litigated variable in class actions – and one that can dramatically affect the length of a class period. Moreover, over the years, courts have become increasingly strict in their analysis of Section 10(b) pleadings: As Hillary Sale documented, requirements for pleading scienter have ratcheted up over the years (and I’d argue that the standards have only tightened since her paper was published; among other things, confidential sources have become de rigueur). Cases like Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008) and Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011) – as well as their precursors in the circuits - have made it increasingly difficult to bring claims not only against secondary actors, but also against corporate executives who do not directly speak to the public. The combined effect of these developments make me question whether class action data – especially class action data that purports to measure changes over time – is a reliable proxy for fraud.
That said, none of these developments has anything to do with lobbying, so theoretically, they may not affect McCarten et al.'s findings. The paper is an interesting one, both for what it adds to the debate on disclosure of political spending, and also for its implications about SOX’s effectiveness (which was, at the time of its passage, famously described as “quack corporate governance”).
Saturday, February 6, 2016
Saturday, January 30, 2016
This piece in the Wall Street Journal reports on a recent article by David F. Benson, James C. Brau, James Cicon, Stephen P. Ferris regarding the language used in charters and bylaws of companies going public. As described in the WSJ, they conclude that companies with shareholder-unfriendly provisions – such as, for example, staggered boards or supermajority voting – are inclined to “camouflage” this fact by using more obscure, harder-to-parse language. And this effect is more pronounced for companies that can expect they won’t be caught – such as, companies with a smaller analyst following and fewer institutional investors. They also find that companies that use camouflage reap benefits in the form of higher pricing. I was intrigued by the description in the WSJ, and thought the findings might be a useful point of discussion in my Sec Reg class, so I tracked down the actual study. But I found myself a bit confused by the evidence offered to support their conclusions.
[More under the cut]
Monday, January 25, 2016
I was going to blog today about Usha Rodrigues’s article on section 12(g) of the Exchange Act, but my co-blogger Ann Lipton stole my thunder over the weekend. If you’re interested in securities law and you haven’t read Ann’s excellent post on section 12(g), you should. Ann discusses Usha Rodrigues’s article on the history and policy of section 12(g); if you haven’t read it, I strongly recommend it. It’s available here. (Even if you’re not interested in reading about section 12(g), I highly recommend Usha’s scholarship in general. I’ve read several of her articles and blog posts over the last few years; she has become one of the leading commentators on securities and corporate law. She blogs at The Conglomerate.)
Instead of discussing section 12(g), I’m going to talk about exams. I finished grading my fall exams about a month ago and I’ve had time to reflect on them. The main reason students don’t do well on exams is that they don’t know or understand the material. But I’ve been reflecting on the difference between exams that are pretty good and exams that are excellent. Those students all know the material, so that’s not the difference.
One of the major differences between a good exam and an excellent exam is in how well students indicate the level of uncertainty in the law.
Sometimes, the law is clear and the answers to issues are certain. Sometimes, the answer is a little fuzzy, but the available authorities point strongly in a particular direction. Sometimes, the answer is completely unclear.
The best exam answers differentiate among those different possibilities and indicate the certainty of the author’s conclusion as to each issue. Bad answers don’t do that. They provide a definite “yes” or “no” to an issue when an unqualified answer is unwarranted. Or they go through a long list of arguments (“on the one hand, . . . ; on the other hand, . . . ) without reaching a conclusion or even indicating which side has the better argument and why.
I can always tell from reading exams which students I would want to consult as attorneys, and this is one of the clues.
Saturday, January 23, 2016
Back in the heady days of 2011, everyone wanted Facebook shares, but Facebook was not yet publicly traded. It was close to bumping up against the then-500 shareholder-of-record threshold, however, which would have triggered reporting requirements under Section 12(g) of the Exchange Act. As a result, Goldman Sachs developed a single investment vehicle to allow clients to invest in Facebook indirectly; the vehicle would purchase Facebook shares (and count as a single shareholder), and then Goldman clients would buy shares of the vehicle. Eventually Goldman ultimately was forced to modify its plan due to a different SEC rule, so its legality was never tested.
Fastforward to 2016. The JOBS Act has now upped the shareholder threshold to 2000 shareholders of record (or 500 unaccredited shareholders), and eliminated the rule that tripped up Goldman’s earlier efforts, so Morgan Stanley and Merrill Lynch are playing the game again with Uber shares. Accredited investors will have the opportunity to buy interests in New Riders LP, whose sole assets will be stock in Uber.
(okay, different New Riders LP).
The minimum price tag is $1 million through Merrill, or a paltry $250K through known-populist Morgan Stanley. The 290-page offering materials are heavy on risk disclosures, but fail to include any financial information about Uber; instead, investors are urged to trust Morgan Stanley’s and Merrill’s valuation.
[More under the jump]
Saturday, January 16, 2016
There has long been a debate about whether corporations should be forced to disclose non-financial information about their operations, particularly information pertaining to social responsibility. For example, as Marcia Narine has repeatedly discussed, Dodd-Frank’s “conflict minerals” disclosure requirement may be not only ineffective to pressure companies into making ethical purchasing decisions, but may even be counterproductive, by causing companies to pull out of the Congo entirely (thus devastating the regional economy) rather than endure the expense of ensuring that their purchases do not indirectly finance armed groups.
Further to this issue, Hans B. Christensen, Eric Floyd, Lisa Yao Liu, and Mark Maffett have recently released a paper studying the effects of Dodd-Frank’s requirement that mining companies disclose information about their compliance with the Federal Mine Safety & Health Act of 1977. They find that after mine-owning companies became subject to Dodd-Frank’s disclosure requirements, they demonstrated a marked decrease in safety violations and injuries, counterbalanced by a decrease in productivity (apparently because they are spending more time on safety compliance). They also find that mines that disclose an “imminent danger order” from regulators post-Dodd Frank not only experience an immediate stock price reaction (especially the first time such an order is received, as compared to subsequent orders), but also experience a change in investor base – specifically, mutual funds (and particularly mutual funds that focus on “socially responsible investment”) divest their holdings.
I find these results fascinating for several reasons.
First – as the authors point out – mine safety information has always been publicly available, but hard to decipher. It’s located on the website of the Mine Safety and Health Administration in a searchable database. The Christensen et al. study is a nice demonstration of the principle that piecemeal, hard-to-decipher information has less of an impact than information compiled in SEC filings. Which, by the way, was exactly what the court held in In re Massey Energy Co. Sec. Litig., 883 F. Supp. 2d 597 (S.D. W. Va. 2012). There, plaintiff-stockholders of Massey Energy argued that the company misled investors about its safety profile. The defendants argued that information about their safety record was publicly available in the MSHA database. The court rejected this “truth on the market” argument, recognizing that difficult-to-parse mine-level data might not offset more prominent misstatements announced to the investing public. This new study validates the court’s reasoning in Massey.
Second, the paper seems to document a real, substantive effect of disclosure on companies' behavior. "Name and shame" apparently does work, at least in this context.
Third, the paper adds to the literature regarding the effects of investor “taste” on asset prices– representing a challenge to simpler models that imagine that asset pricing is purely a function of expected returns. Of course, it is possible that investors treat mine safety data as relevant to returns, to the extent that the higher levels of production from unsafe mines comes at the cost of a higher risk of an expensive mine disaster. But the fact that socially-responsible funds react more strongly to mine-safety disclosures than other funds suggests that taste is part of the story. (Caveat: I am confused as to how the authors selected their mutual funds for the study; if they compared socially responsible funds to all mutual funds, including index funds, the greater reaction of socially-responsible funds may be traceable to the fact that the socially-responsible funds are more likely/able to respond to news about individual companies).
In any event, none of this is to say that disclosure is the best way to regulate corporate behavior – direct command and control, or economic incentives, may be preferable for a lot of reasons, including the fact that disclosure only impacts public companies – but, well, it’s not nothing.
Saturday, January 9, 2016
Spring semester classes begin on Monday, and as a newbie professor, I’ve been spending a lot of my break preparing to teach Securities Regulation for the first time. While all my pals hang out at AALS in New York (hi, guys! Hope you’re having a good time!), I’ve chosen to remain at home, with multiple casebooks spread out over my living room floor.
Though the casebooks naturally focus on federal regulation, most have at least some discussion of regulation at the state level, including a brief explanation of the term “blue sky law.” This is a phrase whose etymology has long been shrouded in mystery; Professors Macey and Miller traced it as far back as 1910, but could not find its origins. See Jonathan R. Macey & Geoffrey P. Miller, Origin of the Blue Sky Laws, 70 Tex. L. Rev. 347 (1991). As a result, the casebooks I’ve seen simply quote the Supreme Court’s opinion in Hall v. Geiger-Jones Co., 242 U.S. 539 (1917), describing such laws as designed to prevent “speculative schemes which have no more basis than so many feet of ‘blue sky.’”
I mention this because a few years ago, Rick Fleming, who was then General Counsel to the Kansas Securities Commissioner, offered an alternative origin story, one both credible and colorful. According to Mr. Fleming, J.N. Dolley – the Kansas Bank Commissioner who authored the original blue sky law in 1911 – published an article in the Topeka State Journal in 1935, where he set forth the following explanation:
I have been given credit for naming the “Blue Sky” law. That name goes back to the drouth of the nineties. We had them then, just the same as now, altho they were not so well dramatized and advertised and we had learned less about feeling sorry for ourselves.
Crops were burning up. Stock water and even water for domestic use was disappearing. It was the day of professional rain makers and some of our people felt we should make every effort to get rain. So we raised the necessary money and contracted with some Chicago slicker to supply us with the necessary quantity of moisture.
They arrived at Maple Hill with two barrels of chemicals, a string of iron pipe and some mysterious mechanical doo-dad. They set up their equipment on a platform within an enclosure to which no one was admitted. Their iron pipe pointed toward the sky. At length it began to emit a light milk colored spray. The machinery was set it (sic) motion.
The milky spray was cast up for four days and four nights. But there was no sign of rain. The fifth day our committee visited the rain makers plant, to discover that the rain makers had disappeared, leaving their equipment behind.
Some of our folks had prepared against overflow damage from rains expected, moving valuables to uper (sic) stories and other property to high grounds. Not only did we have no flood but we saved others from such a fate because the rain making equipment was left with us.
When I appeared before the judiciary committee of the Kansas house and senate with the bill to protect our people against fraudulent stock schemes, one of the senators asked me what to call the law. Remembering our experience with the blue sky artists in trying to make rain, I suggested “the blue sky law.” The name stuck.
Mr. Fleming concludes, “After all these years, let the record reflect that the term ‘blue sky’ does not refer to an investment scheme that is worth no more than air. More accurately, it refers to an investment opportunity in which the promoter promises rain but delivers blue sky.” See Rick A. Fleming, 100 Years of Securities Law: Examining a Foundation Laid in the Kansas Blue Sky, 50 Washburn L.J. 583 (2011).