Saturday, July 26, 2014
One of the classic arguments against private securities liability – and in particular, Section 10(b) fraud-on-the-market liability, with its high potential damages – is that it overdeters issuers, thus stifling voluntary disclosures rather than encouraging them. This was in fact the theory behind the PSLRA’s safe harbor: the statute makes it particularly difficult for private plaintiffs to bring claims based on projections of future performance, in part because of Congress’s fear that expansive liability would dissuade issuers from making projections at all.
Two new empirical studies challenge this common wisdom.
The first, Private Litigation Costs and Voluntary Disclosure: Evidence from Foreign Cross-Listed Firms, by James P. Naughton et al., uses the Supreme Court’s decision in National Australia Bank v. Morrison as a natural experiment. That decision abruptly removed the specter of private Section 10(b) liability based on securities sold on a foreign exchange. The authors compare voluntary earnings guidance offered by firms whose securities are cross-listed in the US and abroad before and after Morrison to determine how the diminished threat of liability affects issuer behavior.
As it turns out, the authors found that earnings guidance decreased for those firms whose securities are cross-listed, as compared to counterparts whose securities are listed solely in the United States. The authors also found that the effect was stronger for firms whose home country had a weak regulatory structure – i.e., firms that did not expect that enforcement in their home country would fill the void left by Morrison. Finally, the authors found stronger effects for firms with a greater proportion of non-US listed shares – i.e., firms most affected by the Morrison decision.
The second study, Carrot or Stick? The Shift from Voluntary to Mandatory Disclosure of Risk Factors, by Karen K. Nelson and Adam C. Pritchard, analyzes “risk factor” disclosures. Under the PSLRA, issuers are insulated from liability for false projections of future performance if the projections are accompanied by sufficiently detailed “cautionary statements,” i.e., descriptions of the variables that could cause actual results to differ from the projections. In this study, the authors compared risk factor disclosures by firms with a high risk of litigation to firms with low litigation risk, and found that higher litigation risk was correlated with more detailed risk disclosures that were more frequently updated from year to year and were presented in more readable language. The effect was strongest prior to 2005, when risk disclosure was voluntary; after 2005, when the SEC made risk disclosure mandatory, the effect recedes, although higher risk firms continue to provide more risk factor disclosure. The authors also show that investors absorb this information: for higher risk firms, there is a correlation between risk factor disclosures and investors’ post-disclosure risk assessments.
These two studies together provide interesting evidence that firms react to the specter of private liability by increasing, rather than decreasing, disclosures. Moreover, the Nelson/Pritchard study in particular concludes that these increased disclosures are in fact meaningful to investors.
Saturday, July 19, 2014
As Haskell Murray previously noted, after Justice Jack Jacobs of the Delaware Supreme Court announced his retirement, Governor Jack Markell quickly nominated a replacement – Karen Valihura – who would be only the second woman justice in the Court’s history. Valihura was confirmed on June 25.
But shortly after Justice Valihura’s nomination was announced, Justice Carolyn Berger – Delaware’s first woman justice – announced her own retirement. Subsequently, Justice Berger stated that she was retiring because Governor Markell had not taken her seriously as an applicant for the Chief Justice slot, which was eventually filled by Leo Strine. She further stated that women face an uneven playing field in judicial nominations in Delaware.
I won’t even begin to speculate about the truth behind Justice Berger’s comments, but I will say that these issues highlight, for me, the extremely problematic nature of Delaware’s dominance in shaping the nation’s corporate law. Most public companies are incorporated in Delaware; companies reincorporate in Delaware when they expect to undergo large transactions likely to be challenged by shareholders, and other states tend to follow Delaware’s lead when interpreting their own law. (In response to a claim that Delaware is only one state, Stephen Bainbridge rejoined with "Which, in context, is sort of like saying Delaware is only one 800-pound gorilla.")
It’s an old issue, and scholars have extensively debated the substantive merits of Delaware’s law. But my concern is a democratic one: I am deeply troubled by the suggestion that sexism may play a role in who gets nominated to such an important court (which I take to be Justice Berger's implication), but I don’t get a vote in Delaware. I have no voice. Even though Delaware’s law has national implications, and its judiciary is incredibly important in shaping national policy, I cannot express my views at the ballot box.
The importance of Delaware’s corporate law is even more apparent in light of decisions like Citizens United and Hobby Lobby. As Elizabeth Pollman observed, the Supreme Court seems to be placing a lot of weight on the mechanisms of state corporate law, and shareholder democracy, to decide complex political and moral issues.
For example, shareholder voting mechanisms, the Court is confident, will control corporate speech, including campaign donations. State corporate law may decide whether a director does – or does not – violate fiduciary duties to the corporation when he places religious concerns among profit motive (assuming, of course, that the First Amendment does not mandate a particular outcome). State corporate law may decide required disclosures regarding the religious attitudes and intentions of controlling shareholders.
The Supreme Court has delegated these decisions to the states – and in no small part, that means to Delaware, which houses about 3% 0.3% of the nation’s population.*
If Delaware is going to have that kind of power, I want a vote.
*that'll teach me to do math on Saturdays
Saturday, July 12, 2014
Since I suspect there is something of an obligation for all corporate law bloggers to weigh in on Hobby Lobby, I offer my thoughts. I admit to some trepidation posting them because (and I blush to confess it) I haven’t been as immersed in the case as most other corporate professors have, so I feel like a bit of an outsider to the debate. So, take these thoughts as coming from someone whose knowledge of the case comes chiefly from, well, the Supreme Court’s opinion.
[More under the cut]
Saturday, June 28, 2014
So, Halliburton Co. v. Erica P. John Fund, Inc. (2014) (“Halliburton II”) came down, and to call it a change in the law is too generous – at best, it might qualify as a “clarification.” After all of the angst over the possibility that the Court might give plaintiffs the burden of proving the price impact of a particular misstatement, the Court soundly rejected that argument, reaffirmed Basic, Inc. v. Levinson (1988), and instead merely allowed defendants to rebut the fraud on the market presumption. Because demonstrating a lack of price impact is as difficult as showing price impact in the first place, I don’t expect Halliburton II to change much in existing law – if anything, some of the rhetoric may make matters easier for plaintiffs.
[More under the cut]
Saturday, June 21, 2014
Professor Urska Velikonja has just published a new article arguing that the trend toward corporate boards with a "supermajority" - not merely a majority - of independent directors is part of a strategy by large institutional investors and corporate managers to fend off more substantive forms of corporate regulation that would reduce shareholder wealth. Her thesis is that when corporations engage in risky and illegal behavior, they - and their shareholders - capture gains while externalizing losses; thus, large shareholders and managers have an interest in staving off real regulation. The easiest way to do that is by advocating for greater board independence - it's functionally a call for self-regulation.
I think the thesis has an intuitive appeal - similar to, for example, The Failure of Mandated Disclosure, which, as Steven Bradford pointed out, argues that we too often default to additional and wasteful disclosures as a substitute for substantive regulation (see also Joan Heminway's post on disclosure creep).
In the case of Professor Velikonja's argument, though, I think the picture is slightly more complicated. Many institutional investors are employee or union pension funds - in other words, their beneficiaries are exactly the third parties to whom corporate misbehavior is externalized. It's not obvious that they, or the funds who represent them, would prefer less substantive regulation, even if it resulted in lower corporate profits; however, the fund fiduciaries - in their capacity as fund fiduciaries - only have limited tools available to protect their beneficiaries. They can advocate for better corporate governance, but it's not obvious that they can, consistent with their fiduciary obligations, advocate for greater corporate regulation. (David Webber discusses some of the limits of fiduciary pension plan discretion in The Use and Abuse of Labor's Capital). Anyway, given these constraints, I am not certain that it is fair to say that institutional investors as a group prefer to advocate for corporate governance reforms over more meaningful regulation - for at least some of them, their options may be somewhat limited.
Saturday, June 14, 2014
Via the 10-5 Daily, I learned of the case In re Maxwell Technologies, Inc. Sec. Litig., 2014 WL 1796694 (S.D. Cal. May 5, 2014), which dismissed the plaintiffs’ securities fraud claims for failure to plead scienter. The case interests me, because I have actually just written a paper on this very subject, forthcoming in the Washington University Law Review (in April 2015 – it’ll be a while!)
[More under the cut]
Saturday, June 7, 2014
On Thursday, the First Circuit handed down its opinion in In re Genzyme Corp. Securities Litigation(.pdf), affirming the dismissal of the complaint. The decision highlights an issue that’s particularly important in securities cases – although, full disclosure, I was very involved with the Genzyme case on the plaintiffs' side before I left practice to teach, so I’m not an unbiased observer. Take that as you will.
[More after the jump]
Saturday, May 31, 2014
A couple of weeks ago, I posted about the Delaware Supreme Court's recent decision in ATP Tour, Inc., et al. v. Deutscher Tennis Bund, et al., which held that nonstock corporations may adopt bylaws that require unsuccessful plaintiffs engaged in intracorporate litigation to pay the defense's attorneys fees. Though the decision did not technically apply to stock corporations, nothing in the decision suggested the analysis for stock corporations would be any different.
The decision prompted an immediate, somewhat panicked response from the Delaware plaintiffs' bar, while some defense attorneys counseled their clients to adopt such bylaws to discourage merger litigation.
Though, as the previous link shows, Steven Davidoff, at least, is skeptical that these provisions would become popular with publicly traded corporations, there has been a quick push to have the Delaware legislature amend the DGCL to overrule ATP. The Delaware Corporation Law Council has proposed new legislation that will be considered by the Delaware legislature by June 30.
Saturday, May 24, 2014
The SEC recently announced that it intends to pursue more cases under Section 20(b) of the Exchange Act, which prohibits people from violating the Exchange Act “through or by means of any other person.” I suspect this move will have serious implications for private cases under Section 10(b).
Saturday, May 17, 2014
Reuven S. Avi-Yonah recently posted Just Say No: Corporate Taxation and Corporate Social Responsibility.
He poses the question whether corporations are obligated to engage in strategic transactions solely for the purpose of avoiding taxes. His conclusion is basically that under any theory of the firm – aggregate, real entity, or artificial entity – corporations have an affirmative obligation not to engage in overly-aggressive tax planning.
His thesis is attractive, though I'm not sure it's entirely convincing. He basically posits that taxes are the means by which we ensure a peaceful and civilized society, and no matter what theory of the firm one endorses, it is therefore proper for corporations to shoulder that burden. The argument, however, would seem to encompass any form of strategic behavior - i.e., the argument would apply to all behaviors in which corporations can engage that evade the spirit of various regulations intended for the greater good of society. If so, then it's not clear that the argument gets us very far in terms of determining the legitimate boundaries of corporate behavior.
Friday, May 9, 2014
In ATP Tour, Inc., et al. v. Deutscher Tennis Bund, et al., the Supreme Court of Delaware upheld a fee-shifting provision in a non-stock corporation's bylaws, providing that unsuccessful plaintiffs in intracorporate litigation would be required to pay the fees and costs of defendants.
The court was answering a certified question from the Third Circuit, and thus was careful to note that it was only answering the question in the abstract, and that any such bylaw would have to be tested in a particular instance to determine if it was equitable. But the court agreed that the bylaw appropriately concerned the "business of the corporation, the conduct of its affairs,
and its rights or powers or the rights or powers of its stockholders, directors, officers or employees" as the DGCL requires, and therefore was within the power of the directors to adopt. The court also held that the purpose to deter litigation was not, in the abstract, "improper," such that the bylaw could be invalidated on that ground.
The court was careful to repeat that this was a "nonstock" corporation, but nothing in the opinion suggests that the outcome would be any different for a publicly-traded corporation.
I've got to admit, I'm kind of amazed, looking at it from a purely cynical perspective. Previously, in Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), a Delaware Chancery court upheld forum selection provisions in the corporate bylaws of a publicly traded corporation, using a similar rationale - but it's impossible not to notice that that decision only benefitted Delaware, since it was a foregone conclusion that most corporations choosing to enact such bylaws would select Delaware as the forum.
If corporations enact fee-shifting provisions, though, that could seriously deter intracorporate litigation in general - which would not, in the long run, be particularly beneficial to Delaware.
Of course, it remains to be seen how Delaware courts will treat specific instances of fee-shifting provisions in particular cases - it may ultimately set the bar so high for review of such clauses that effectively they have little application. It's also very difficult to gauge how such clauses will or should apply to class actions or to derivative claims - in those cases, the individual plaintiff bringing the lawsuit does so on behalf of all stockholders, and therefore it hardly makes sense for it to shoulder burdens properly allocable to all stockholders. But even outside of those contexts, a fee-shifting provision could be a powerful new form of antitakeover device.
But the next question is the elephant in the room - binding arbitration of shareholder disputes. Even if Delaware would otherwise be inclined to reject such clauses as a bridge too far, after permitting forum selection provisions and fee-shifting provisions, under the Federal Arbitration Act, Delaware may be required to treat arbitration clauses similarly. (A Maryland court recently held that arbitration clauses in the bylaws of a REIT were binding on all shareholders; that decision was then endorsed by a federal court in Del. County Emples. Ret. Fund v. Portnoy, 2014 U.S. Dist. LEXIS 40107 (D. Mass. Mar. 26, 2014)). And if that happens ... well, there are a number of possibilities, but the most obvious would be a dramatic reduction of shareholder litigation in Delaware.
Saturday, May 3, 2014
Saturday, April 26, 2014
FINRA and NASD rules have long provided that customers must arbitrate individual disputes with their brokers, but that class claims can be brought in court (and are not subject to arbitration).
In 2011, after the Supreme Court’s decision in AT&T Mobility v. Concepcion, the brokerage company Charles Schwab amended all of its customer agreements to require that the customer waive the right to bring class claims and agree to resolve all disputes in individual arbitration.
FINRA brought an enforcement action against Charles Schwab for violation of its rules, and in 2013, a hearing panel concluded that the FINRA rules were unenforceable because they conflicted with the Federal Arbitration Act.
On Thursday, that decision was overruled by the FINRA Board of Governors. FINRA concluded that its rules, promulgated in conjunction with, and under the oversight of, the SEC, represent valid exercises of regulatory authority that override the FAA.
Obviously, this conclusion raises a lot of interesting legal questions about the authority of the SEC to abrogate the FAA, and conflicts between the Exchange Act and the FAA (Barbara Black and Jill I. Gross have written extensively on this issue).
But the part that immediately interests me is FINRA’s conclusion that even though it is – in its view – merely a private actor, it is subject to restrictions imposed by the FAA.
The FAA requires that contracts for arbitration be deemed as valid/enforceable as any other contract. As a result, the FAA has been interpreted to preempt any state law – statutory or common – that purports to invalidate arbitration agreements or render them unenforceable, and the Supreme Court has – at least in recent years – steadfastly refused to find that federal statutory rights are implicitly ill-suited for arbitration.
But if FINRA is a private actor – a point to which I’ll return in a moment – it is difficult to see how the FAA comes into play. The FAA does not inhibit private actors from reaching whatever contracts they desire – including, in FINRA’s case, contracts with its member organizations to prohibit them from imposing certain contractual conditions on its customers. If FINRA is a purely private actor, it has no power to make any customer contract imposed in violation of its membership rules any less enforceable or valid than any other contract – all it has is the power to exclude brokerages from its membership and impose fines for violation of its membership rules. One thing has nothing to do with the other. Otherwise, arbitration clauses would be more than any other contract clauses – they’d be superclauses, areas of law over which parties are not permitted to bargain. Nothing in the FAA suggests that it was intended to impede private parties’ bargains – to arbitrate or not – and there is no precedent suggesting that the FAA prohibits private actors from arranging their affairs as they wish. Cf. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967) (“the purpose of [the FAA] was to make arbitration agreements as enforceable as other contracts, but not more so”).
The only reason that the FAA is implicated in this dispute, in my view, is because FINRA is not a purely private actor – as an SRO, it exercises “quasi-governmental powers.” DL Capital Group, LLC v. Nasdaq Stock Mkt., Inc., 409 F.3d 93 (2d Cir. 2005). For example, it enjoys from governmental immunity from lawsuits, and – as the Schwab decision itself highlights – its rules have the status of regulations. In this very case, a district court held that it did not have “jurisdiction” to entertain Charles Schwab’s objections to the FINRA complaint until Charles Schwab “exhausted” its remedies with FINRA, see Charles Schwab & Co v. Fin. Indus. Regulatory Auth., 861 F. Supp. 2d 1063 (N.D. Cal. 2012) – not exactly the kind of power private parties can exercise. It is precisely because FINRA exercises governmental and regulatory authority that it is capable of running afoul of the FAA.
The Schwab decision, it seems to me, represents a curious case of FINRA trying to have it both ways – to insist that it is merely a private entity whose membership agreements are purely matters of contracts, but also to insist that the rules that govern those entities have the force of government authority behind them.
Saturday, April 12, 2014
Well, it's almost exam time at most law schools, and by the end of this week, I have to turn in my first exam to the registrar. I'm teaching Securities Litigation, and it's mostly a lecture course - the first time I've ever taught. I knew writing an exam would be difficult, but I didn't anticipate all of the types of issues I would experience.
Mostly, I'm trying to develop one or two solid issue-spotter-type questions for them to examine.
The first and most obvious concern is making sure that it has varying levels of difficulty, so that it distinguishes between students who are better and less-well prepared.
Additionally, since I haven't done this before, I need to make sure that it takes the right amount of time to complete - it's an 8 hour take home; I'm guessing that erring on the shorter side is preferable to longer, since I'm likely to underestimate the difficulty of the material.
I also find, as I develop the fact pattern, that it really forces me to confront which areas we did not cover extensively, and which areas we did (thus perhaps offering a guide for edits to the syllabus in the future) - for example, I keep discarding potential scenarios because I realize they would implicate too many issues we only touched on tangentially.
Part of the difficulty, I think, is that because the course is Securities Litigation, it includes both substantive securities doctrine, and a some civil procedure issues as they arise in the securities context. It's difficult to develop a realistic fact pattern that directs them toward precisely the topics we've covered without implicating the topics - particularly civil procedure topics - we have not covered.
Ultimately, I think I will have to sacrifice some degree of realism in order to make sure that the students' attention is directed in the right place, and I don't inadvertently end up testing them on how well they remember Civil Procedure topics they covered in other classes, but we did not discuss in my class.
Also, I have to just accept that there will be some parts of the course that simply won't be on the exam. So be it.
Saturday, April 5, 2014
As I write this on Friday night (to be posted automatically on Saturday morning, during which time I will be in transit), ILEP's latest symposium, Business Litigation and Regulatory Agency Review in the Era of the Roberts Court, is just concluding (you can see a list of the papers presented here, which I believe will all eventually be published in the Arizona Law review).
The biggest subject for discussion was basically the future of the securities class action - or any kind of business litigation, really - given not only the potential of Halliburton to eliminate or severely restrict securities class actions, but given recent decisions like this one upholding a mandatory arbitration provision unilaterally adopted into a REIT's bylaw.
The final panel, and thus the one freshest in my mind, explored whether states have the ability under the Federal Arbitration Act to limit the power of corporations to impose mandatory arbitration to resolve shareholder disputes. I think that's a really interesting question - whether either states can, as a function of their ability to regulate corporations, flatly forbid the adoption of mandatory arbitration agreements in corporate charters and bylaws, in the same way they otherwise regulate corporate governance matters. The FAA's nondiscrimination provisions only apply to contracts, so states' power in this regard turns on whether regulation of corporate governance and the limits of directorial power counts as a type of contractual regulation, or not. There was also a lot of discussion about whether the fact that directors have fiduciary obligations to shareholders - rather than a mere contractual relationship - gives states more of a regulatory power over their behavior (and their ability to adopt arbitration provisions) than the FAA might otherwise prohibit.
The only real question is how quickly this question gets answered. On the one hand, there seemed to be a sense of the room that it will take time for these issues to bubble up throught the courts - and maybe that's right, especially if multiple states' law has to be interpreted. And of course, the above-linked case arose in the context of the Commonwealth REIT - except the trustees' adoption of the mandatory arbitration bylaw did not, in fact, work out well for them, and may serve as a cautionary tale for corporate directors considering similar actions in the immediate future.
On the other hand, sometimes the law is developed much more quickly than anyone expects - witness the gay marriage cases, which no one would have predicted a few years ago. This immediate decision from the District of Massachusetts upholding the REIT bylaw (and the Maryland decision on which it rests) may be the proverbial camel's nose....
Monday, March 31, 2014
Michael Lewis, the author of Liar's Poker and The Big Short, has just released a new book, Flash Boys: A Wall Street Revolt. He argues that high-speed trading results in “rigged” securities markets. I don't always agree with Lewis's positions, but he writes well and it should be an interesting book.
Here are two other interesting takes on the effect of high speed trading on securities markets:
- Yesha Yadav, Beyond Efficiency in Securities Regulation. An academic article arguing that the rise of algorithmic trading “profoundly challenges” notions of market efficiency.
- Scott Patterson, Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market. A very interesting look at the rise of high-speed, computerized trading and its effect on the market.
Saturday, March 22, 2014
Professors Lucian Bebchuk and Robert Jackson have recently posted a paper to SSRN, Toward a Constitutional Review of the Poison Pill. In the paper, they argue that state laws that facilitate the use of “poison pills” are unconstitutional in the sense that they are in conflict with the Williams Act, because they have the potential to introduce undue delay into the tender offer process. To the extent Profs. Bebchuk and Jackson purport to be summarizing existing doctrine, I have my doubts....
[More after the jump]
Saturday, March 15, 2014
As long as the Supreme Court keeps granting cert in securities cases, I will have things to blog about
On Monday, the Supreme Court agreed to hear Public Employees’ Retirement System of Mississippi v. IndyMac MBS, Inc., No. 13-640, concerning American Pipe tolling of statutes of repose. Depending on how the Court chooses to frame the issues, the holding could extend to countless class actions, or it could even be securities-specific, based solely on the PSLRA.
[Read more after the jump]
Saturday, March 8, 2014
On Wednesday, the Supreme Court heard oral arguments in Halliburton Co. v. Erica P. John Fund, Inc., 13-317 (Halliburton II), where it was being urged to overturn, or curtail, the fraud on the market presumption approved in Basic, Inc. v. Levinson (1988). Judging by the transcript, and as numerous reports indicated, it seems as though the Justices were attracted to the idea of tweaking Basic to require that plaintiffs prove the “market impact” of a particular false statement. Most surprisingly, although this was the fallback position urged by the defendants, it was also endorsed by Malcolm Stewart of the Solicitor General’s office, who was nominally arguing on the plaintiff’s side. Though one can never tell what will happen in the end, it does seem like this may be the direction in which the Court is headed – and if so, it could have significant implications for fraud-on-the-market cases in the future.
[More under the cut]
Saturday, March 1, 2014
On Wednesday, the Supreme Court decided 7-2 that the victims of Allen Stanford’s Ponzi scheme could pursue state law class action claims against those who allegedly aided and abetted him (.pdf) – most notably, the law firms of Chadbourne & Park and Proskauer Rose. But the opinion still leaves several questions unanswered, and it’s impossible not to read Troice without trying to tea leaf the Justices’ inclinations in Halliburton.
[Read more after the jump]