Wednesday, December 4, 2013
Earlier this week the SEC released its 2014 rulemaking agenda and excluded from the list is a proposal for public companies to disclose political spending. In 2011, the Committee on Disclosure of Corporate Political Spending, comprised of 10 leading corporate and securities academics, petitioned the SEC to adopt a political spending disclosure rule. This petition has received a historic number of comments—over 640,000—which can be found here.
The Washington Post reported that after the petition was filed,
A groundswell of support followed, with retail investors, union pension funds and elected officials at the state and federal levels writing to the agency in favor of such a requirement. The idea attracted more than 600,000 mostly favorable written comments from the public — a record response for the agency.
Omitting corporate political spending from the 2014 agenda has received steep criticism from the NYT editorial board in an opinion piece written yesterday declaring the decision unwise “even though the case for disclosure is undeniable.” Proponents of corporate political spending disclosure like Public Citizen are “appalled” and “shocked” by the SEC’s decision, while the Chamber of Commerce declares the SEC’s omission a coup that appropriately avoids campaign finance reform.
Included in the 2014 agenda are Dodd-Frank and JOBS Act measures, as well as a proposal to enhance the fiduciary duties owed by broker-dealers. More on the agenda in future posts….
Tuesday, November 26, 2013
Every day MIDAS collects about 1 billion records from the proprietary feeds of each of the 13 national equity exchanges time-stamped to the microsecond. MIDAS allows us to readily perform analyses of thousands of stocks and over periods of six months or even a year, involving 100 billion records at a time.
MIDAS collects posted orders and quotes, modifications/cancellations, and trade executions on national exchanges, as well as off-exchange trade executions.
The methodology for MIDAS is available here.
Happy Thanksgiving BLPB readers!
Wednesday, November 20, 2013
I was recently asked to evaluate a corporation’s obligation to indemnify a director named in a derivative suit initiated by the corporation alleging that the director usurped corporate opportunities. The MBCA establishes a standard framework for optional and mandatory indemnification of directors and officers, sets the appropriate boundary of indemnification obligations (i.e,. no reimbursement of derivative suit settlements or intentional misconduct), establishes the procedures for indemnification and advancement of expenses, and provides mechanisms for directors to enforce their indemnification rights through court orders. The standard procedures for indemnification require the corporation to authorize the indemnification and make a determination that the conduct at issue qualifies for indemnification.
MBCA § 8.55 Determination and Authorization of Indemnification
(a) A corporation may not indemnify a director ….[until after] a determination has been made that indemnification is permissible ..[and].. director has met the relevant standard of conduct ….
(b) The determination shall be made:
(1)…. a majority vote of all the qualified directors…., or by a majority of the members of a committee;
(2) by special legal counsel ….or
(3) by the shareholders, but shares owned by or voted under the control of a director who at the time is not a qualified director may not be voted on the determination.
(c) Authorization of indemnification shall be made in the same manner as the determination that indemnification is permissible…..
The determination is tricky for advanced expenses because the determination is made before the adjudication and with limited facts. Yet, as the comments to the MBCA reflect, access to advance funds is often necessary to provide directors/officers with full protection because few individuals have personal resources to finance potentially complex and protracted litigation. Some states, like Georgia OCGA § 14-2-856 and Delaware § 145, broaden the indemnification provisions established in the MBCA by providing procedures for shareholder agreements to expand the scope of corporate indemnification obligations and avoid the “determination” of complying conduct required under the MBCA. A writing mandating an advance of expenses creates a vested right that cannot be unilaterally terminated. More importantly, statutes that recognize a vested right to advanced expenses avoids the requirement of a determination regarding the advance, which will often constitute a self-dealing transaction (director named in suit and seeking advance, also votes on determination of conduct qualification for indemnification) and therefore requires the entire fairness evaluation.
The expanded indemnification statutes raise all sorts of interesting questions about the scope of indemnification (the Georgia statute for example is intended to expand the scope to possibly include derivative suit settlements and fines), the process required for the mandatory advances (i.e., whether a shareholder vote approving the obligation can later be attacked because a defendant, who is now conflicted, voted shares in favor of the obligation), and whether these provisions violate public policy. If you know of cases addressing these issues or litigating these expanded indemnification statutes in other jurisdictions, please respond in the comments.
Wednesday, November 13, 2013
We live in a world where most working individuals have some retirement savings invested in the stock market. The stock market funds, in part, college educations, and serve as the primary wealth accumulator for post-baby boom generations. My parents—an elementary school teacher and a furniture salesman—lived in Midwestern frugality and invested their savings from the mid-80’s until 2006 when they pulled out of the market. They retired early, comfortably (so I believe), and largely because of consistent gains in the stock market over a 30 year period. The question is whether this story is repeatable as a viable outcome for working investors now.
The Wall Street Journal ran a story on Monday “Stocks Regain Appeal” documenting the number of dollars flowing into markets from retail investors as well as the anecdotal confidence of investors. The WSJ reports that:
“U.S. stock mutual funds have attracted more cash this year than they have in any year since 2004, according to fund-tracker Lipper. Investors have sent $76 billion into U.S. stock funds in 2013. From 2006 through 2012, they withdrew $451 billion.”
This seems indisputably good right? Maybe. The real question for me is why is more money flowing into the markets and confidence high? Is this behavior driven by information, emotion, or herd mentality? Robert Shiller, recent Nobel Prize winner and author of Irrational Exuberance, wrote in March in a column for the NYT that investors were confident, but who knows why. Shiller’s conclusions were based on data from the cyclically adjusted price-earnings ratio, CAPE, of 23 suggesting that the market was priced high, which is interesting when compared with his data that 74% of individual investors did not think that the market was overpriced. Shiller strengthened his cautionary stance on the market last month when the CAPE held at 23.7, and Shiller warned that stocks were the “most expensive relative to earnings in more than five years.”
This is business law blog, not a market blog, yet the role of the market interests me greatly. As corporate law scholars, we teach students and write about the legal limits, obligations and assumptions that establish the market and dictate how individuals and institutions interact with the market and corresponding corporate-level controls. In 2007 the market collapsed (self-corrected if we want to use the economists’ terms) and what was the result? Dodd-Frank and a series of legislation aimed at policing the market. If we are interested in the laws that govern the market, surely some attention must be paid to how and why the market works the way that it does.
Wednesday, November 6, 2013
Yesterday was election day! Elections hold a special place in my heart, and I remain interested in the interplay of corporations and campaigns, especially in a post-Citizens United world. The races, candidates, and results, however, received significantly less attention without a federal election (mid-term or general) to garner the spotlight. The 2014 election season, which officially begins today, has several unknowns. While Citizens United facilitated unlimited independent expenditures (distinguishable from direct campaign contributions) for individuals and corporations alike, corporations remain unable to donate directly to campaigns. Individual campaign contributions are currently capped at $2,500 per candidate/election and are subject to aggregate caps as well. McCutcheon v. FEC, which was argued before the US Supreme Court on October 8, 2013, challenges the individual campaign contribution cap. If McCutcheon removes individual caps, the foundation will be laid to challenge corporate campaign contribution bans as well. See this pre-mortem on McCutcheon by Columbia University law professor Richard Briffault. As for current corporate/campaign finance issues, the focus remains on corporate disclosures of campaign expenditures in the form of shareholder resolutions (118 have been successful) and company-initiated disclosure policies, possible SEC disclosure requirements for corporate political expenditures, and the threat of legislation augmenting corporate disclosure requirements for political expenditures (see, for example the latest bill introduced: the Corporate Politics Transparency Act (H.R. 2214)).
As an aside, brief treatment of the questions regarding the rights of corporations to participate in elections, and the role of corporations in our democracy elicit some of the best (and most heated) student discussions in my Corporations class. If you have the stomach for it, I highly recommend that you try it!
Wednesday, October 30, 2013
I have a new article, Retirement Revolution: Unmitigated Risks in the Defined Contribution Society, which describes citizen shareholders--individual investors who enter the stock market through defined contribution plans--and examines the overlapping corporate and ERISA laws that govern their investments.
A revolution in the retirement landscape over the last several decades shifted the predominant savings vehicle from traditional pensions (a defined benefit plan) to self-directed accounts like the 401(k) (a defined contribution plan) and has drastically changed how people invest in the stock market and why. The prevalence of self-directed, defined contribution plans has created our defined contribution society and a new class of investors — the citizen shareholders — who enter private securities market through self-directed retirement plans, invest for long-term savings goals and are predominantly indirect shareholders. With 90 million Americans invested in mutual funds, and nearly 75 million who do so through defined contribution plans, citizen shareholders are the fastest growing group of investors. Yet, citizen shareholders have the least protections despite conventional wisdom that corporate law and ERISA protections safeguard both these investors and their investments. As explained in an earlier paper, citizen shareholders do not fit neatly within the traditional corporate law framework because their investment within a defined contribution plan restricts choice and their indirect ownership status dilutes their information and voting rights, as well as exacerbates their rational apathy as diffuse and disempowered “owners.”
Wednesday, October 23, 2013
Yesterday, the Executive Director, James Leipold, of NALP (the National Association of Law Placement) presented data regarding law graduate hiring trends from 2000 through 2012, both nationally and for my school (Georgia State University College of Law). It provided an understanding of the changes to the legal market as a whole, and for our graduates specifically. I wasn’t aware of the data compiled by NALP and available on their website prior to this presentation, and man was I impressed. As a faculty member who frequently counsels students on job searches, the data paints a very interesting story about HOW a majority of law graduates find jobs and WHERE they find them. The data also tells a very compelling story of how the 2008 financial crisis/Great Recession has impacted the legal hiring market. (In short: big law jobs are down significantly which was created downward pressure on alternative career paths as students who would have traditionally pursued big law jobs compete for other positions.)
On the HOW question, the data confirmed a suspicion of mine about how a majority of students find jobs. Of course these statements will be either more or less true depending on the reputational capital of your school. Before the Great Recession approximately 20% of students found their post-graduation job through on campus interviewing (OCI) and that number is now approximately 14%. This means that even before the Great Recession, but certainly today, a vast majority of students find jobs through other means such as networking/personal referral, self-initiation such as inquiring about job opportunities and sending out resumes, and responding to postings on sites like Monster.com. In thinking about HOW law students find jobs, this information provides a powerful narrative that students who are working hard to find a job are not alone, and not the outlier now, or even in the past. This information will shape the advice that I give students about where and how to place their energy during their three years in law school. If in-school activities do not land a student on law review and the top 10% of their class, then focusing on external opportunities to network and gain professional contacts in law practice and law-related fields should be a top priority for students.
And now for the WHERE part, private practice job placement is down from a steady 55% to approximately 50% of post-graduation jobs. One of the sectors that has absorbed this shift is JD hiring by businesses, which is up to almost 18% of new graduate jobs (from historic percentages of 12-13%). The NALP report on 2012 graduates 9 months after graduation concludes that:
“Employment in business was 17.9%, down a bit from the historic high of 18.1% reached in 2011, but still higher than the 15.1% for the Class of 2010. The percentage of jobs in business had been in the 10-14% range for most of the two decades prior to 2010, except in the late 1980s and early 1990s, when it dipped below 10%. About 29% of these jobs were reported as requiring bar passage, and about 39% were reported as jobs for which a JD was an advantage.”
Out of a presentation that included a host of facts and figures, I want to highlight one other part of the picture painted by the data. Feedback from legal employers (mostly private practice law firms) said that in new-JD hires, they were looking for students who understand that practicing law in a firm is a business and how they fit into that business model. They also want students to have a basic understanding of financial literacy skills. I plan on sharing this information with our students who are turning their attention to scheduling classes for their spring semester. I see this as a clear justification for emphasis on business-related classes.
Wednesday, October 16, 2013
The 2013 Nobel Prize in Economics winners were announced earlier this week and the award was shared by three U.S. Economists for their work on asset pricing. Eugene Fama of the University of Chicago, Lars Peter Hansen of the University of Chicago and Robert Shiller of Yale University share this year’s prize for their separate contributions in economics research.
The work of the three economics is summarized very elegantly in the summary publication produced by The Royal Swedish Academy of Sciences titled “Trendspotting in asset markets”. The combined economic contribution of the three researchers is described below:
The behavior of asset prices is essential for many important decisions, not only for professional investors but also for most people in their daily life. The choice on how to save – in the form of cash, bank deposits or stocks, or perhaps a single-family house – depends on what one thinks of the risks and returns associated with these different forms of saving. Asset prices are also of fundamental importance for the macroeconomy, as they provide crucial information for key economic decisions regarding consumption and investments in physical capital, such as buildings and machinery. While asset prices often seem to reflect fundamental values quite well, history provides striking examples to the contrary, in events commonly labeled as bubbles and crashes. Mispricing of assets may contribute to financial crises and, as the recent global recession illustrates, such crises can damage the overall economy. Today, the field of empirical asset pricing is one of the largest and most active subfields in economics.
This year’s award has several implications for those of us interested in the legal side of law and economics. First, Fama is the grandfather of the efficient capital market hypothesis, the foundation for fraud on the market, a economics elements incorporated into securities fraud litigation.
Second, Fama’s inclusion in the award is being heralded by some as a win, or vote of confidence, for free marketers whose regulatory view (that markets should be largely unregulated) rests on the fundamental assumption that markets are efficient. On the other hand, Shiller’s inclusion in the award challenges the coup that can be claimed by free marketers because Shiller has long questioned the efficiency of the markets. John Cassidy at The New Yorker writes “Shiller, in showing that the stock market bounced up and down a lot more than could be justified on the basis of economic fundamentals such as earnings and dividends, kept alive the more skeptical and realistic view of finance that Keynes had embodied in his “beauty contest” theory of investing.” Market efficiency, or lack thereof, are key arguments against and for market regulations. Trends in support for either theory or validation of one could signal future approaches to regulation.
Finally, the focus on asset pricing, particularly Fama’s work has some potential implications for the mutual fund industry. Fama’s efficiency view of the markets largely discounts the value of actively managed funds, once costs and annual fees are deducted because the market, if efficient, cannot consistently be beaten. This last thread regarding fund management is a theme woven into some of my more recent research on the regulations, risks, and ownership anomalies facing retirement investors. More on this later, with links to newly published papers of course, but for now read the Nobel summary document included above and briefly contemplate taking the time to audit an economics course next semester—I am going to browse the b-school catalogue now.
Wednesday, October 9, 2013
I am emerging from a rabbit hole of research that began approximately 3.5 hours ago. The question was inspired by teaching the 2002 Delaware Supreme Court case, Download Gotham 817_A.2d_160, in my unincorporated business associations class and students' drafting of fiduciary duty waivers in a limited partnership agreement. Many of you are already aware that Delaware allows for the complete elimination of general partners' fiduciary duties. I knew that Delware was an outlier in this area, but I wasn't certain by how much. So 3.5 hours and a 50 state (plus D.C.) survey later, I have a concrete answer. Only Delaware ( Download Delaware GP Fiduciary duty statute) and Alabama ( Download Alabama Statute) statutes allow for the complete elimination of fiduciary duties for general partners. The remaining 49 jurisdictions surveyed only allow for the expansion or restriction of fiduciary duties, but not the elimination. Of those 49 jurisdictions, 20 have a stand alone provisions that outline the fiduciary duties of general partners, and 29 statutes establish the minimum fiduciary duties for general partners by linkage to the traditional partnership statutes. Of the 29 jurisdictions that rely on linkage to traditional partnership statutes, 13 use a Uniform Partnership Act (1914) "accounting" style fiduciary duty provision and 16 use a revised Uniform Partnership Act (1997) enumerated fiduciary duties style provision.
My initial research table is available here: Download LP Fiduciary Duty waiver Chart.
My findings raise several questions. The first is a curiosity as to where else are Delaware statutes outliers and what does this say about the reach of Delaware law? The ubiquity of Delaware law is limited by the incentives for foreign entities to avail themselves of Delaware state laws, the challenge to Delaware's dominance is seen most clearly with closely-held firms.
Wednesday, October 2, 2013
Is there a sociological explanation for why Wall Street--and other large, complex and interconnected systems--are rigged for crisis? Charles Perrow, author of Normal Accidents: Living with High Risk Technologies says yes. Normal accidents occur when two or more unrelated failures interact in unpredicted ways. As applied to Wall Street, the theory is that as the number of trades, a steeply rising number, increases and as the market becomes increasingly technology dependent, the likelihood of these normal accidents occuring also increases. Examples of normal accidents in the financial markets include the flash crash based on the false tweet that there were explosions at the White House last spring, the NASDAQ software glitch that caused the flash freeze in August, and the unprecedented trading losses suffered during the financial crisis of 2008. This article in the Atlantic provides a provocative description of Wall Street's normal accidents, predicts that more are to come, and suggests that limiting the number/volume of trades is one place to start in thinking about reducing the occurance and significance of these normal accidents.
A specific example of a normal accident is: "one trader at JP Morgan Chase" racking up a "$6 billion in trading losses while the company’s CEO, Jamie Dimon, thinks everything is under control."
That natural accident and other alleged misdeeds of JP Morgan have the company and its legal troubles back in the news. After the company's September settlement with the SEC, which included an admission of wrong-doing and a $200 million fine, there is talk of a global settlement of all state and federal inquiries into its mortgage practices. The settlement, news of which broke last week, is rumored to be around $11 billion, but is in jeopardy. The FDIC is opposing an indemnification provision of the settlement that would put an indemnificaiton responsibility on the FDIC 5 years after the settlement and push approximately $3.5 billion in liabilities on to the FDIC.
This article (also from the Atlantic) provides a great description of the conduct at the center of JP Morgan's legal troubles and outlines the company's ongoing litigation related to the financial crisis and subsequent scandals (i.e., the Libor scandal).
Wednesday, September 25, 2013
Next week (September 29th to be exact) an experimental free-trade zone in Shanghai will open, the first of its kind in mainland China. The free trade zone boasts the possibility for relaxed trade and foreign investment standards. Just how radical the free trade zone will be in its implementation is unknown, and will unfold as the operations being. Allowing telecommunications companies to compete with state-owned providers, lifting bans on video game sales, liberalizing interest rates, and enhancing currency convertibility are among the stated goals of the free trade zone. Additionally, a Hong Kong newspaper (note: Hong Kong is itself a free trade zone) reported yesterday that Facebook, Twitter, the New York Times and other previously banned websites will be allowed to operate within the free trade zone.
Enhancing currency convertibility is a broader goal of China, which has stated its intention for the renminbi to be fully convertible by 2015. Currency convertibility may in turn elevate the renminbi to reserve currency status, where the central banks of other countries hold the renminbi. Reserve currencies—the leader of which is the U.S. dollar and also includes the Swiss franc, the Japanese yen, the sterling pound and the euro—benefit the issuing country by reducing the transaction costs for international commerce by eliminating exchange rate conversion risks and reduced borrowing costs. With China’s export economy, attaining reserve status could mean big business and big bucks.
The free trade zone also has potential implications for the U.S. and Chinese stock markets. For starters, the Chinese stock market has been climbing in the wake of the free trade zone news, and climbed again yesterday on the heels of the internet accessibility news. The Chinese market, while presently still considered instable, has seen tremendous growth since the 2005 reforms of non-tradeable stock, and backed by the second largest economy in the world stands poised as “the” emerging market. For domestic companies and U.S. exchanges, the free trade zone presents opportunities as well. For example, Microsoft is the first U.S. company that has announced a joint venture with a Chinese technology company in order to offer video game consoles in the free trade zone, consoles like the Xbox, which have been banned since 2000. If the free trade zone signals greater access to the Chinese consumer markets on a broader scale, this could mean a large market expansion for many U.S. companies.-Anne Tucker