Monday, November 20, 2017
The Oklahoma Law Review recently published an article I wrote for a symposium the law review sponsored last year at The University of Oklahoma College of Law. The symposium, “Confronting New Market Realities: Implications for Stockholder Rights to Vote, Sell, and Sue,” featured a variety of presentations from some really exciting teacher-scholars, some of which resulted in formal published pieces. The index for the related volume of the Oklahoma Law Review can be found here. I commend these articles to you.
The abstract for my article, "Selling Crowdfunded Equity: A New Frontier," follows.
This article briefly offers information and observations about federal securities law transfer restrictions imposed on holders of equity securities purchased in offerings that are exempt from federal registration under the CROWDFUND Act, Title III of the JOBS Act. The article first generally describes crowdfunding and the federal securities regulation regime governing offerings conducted through equity crowdfunding — most typically, the offer and sale of shares of common or preferred stock in a corporation over the Internet — in a transaction exempt from federal registration under the CROWDFUND Act and the related rules adopted by the U.S. Securities and Exchange Commission. This regime includes restrictions on transferring securities acquired through equity crowdfunding. The article then offers selected comments on both (1) ways in which the transfer restrictions imposed on stock acquired in equity crowdfunding transactions may affect or relate to shareholder financial and governance rights and (2) the regulatory and transactional environments in which those shareholder rights exist and may be important.
Ultimately, the long-term potential for suitable resale markets for crowdfunded equity — whether under the CROWDFUND Act or otherwise — is likely to be important to the generation of capital for small business firms (and especially start-ups and early-stage ventures). In that context, three important areas of reference will be shareholder exit rights, public offering regulation, and responsiveness to the uncertainty, information asymmetry, and agency costs inherent in this important capital-raising context. Only after a period of experience with resales under the CROWDFUND Act will we be able to judge whether the resale restrictions under that legislation are appropriate and optimally crafted.
Those familiar with the literature in the area will note from the abstract that I employ Ron Gilson's model from "Engineering a Venture Capital Market: Lessons from the American Experience" (55 Stan. L. Rev. 1067 (2003)) in my analysis.
I know others are also working in and around this space. I welcome their comments on the essay and related issues here and in other forums. I also know that we all will "learn as we go" as the still-new CROWDFUND Act experiment continues. Securities sold in the early days of effectiveness of the CROWDFUND Act (which became effective May 16, 2016) are just now broadly eligible for resale. Stay tuned for those lessons learned from the school of "real life."
Monday, October 30, 2017
The title of this post is hyperbole on some level. But with Halloween being tomorrow, I couldn't resist the temptation to use a festive greeting to introduce today's post. And there is a bit of a method to my titling madness . . . .
I admit that I do feel a bit tricked by the removal of the Leidos, Inc. v. Indiana Public Retirement System case (about which co-blogger Ann Lipton and I each have written--Ann most recently here and I most recently here) from the U.S. Supreme Court's calendar. It was original scheduled to be heard a week from today. Apparently, based on the related filings with the Court, the parties are documenting a settlement of the case. Kevin LaCroix offers a nice summary here. How cunning and skillful! Just when I thought resolution of important duty-to-disclose issues in Section 10(b)/Rule 10b-5 litigation was at hand . . . .
Indeed, I had hoped for a treat. What pleasure it would have given me to see this matter resolved consistent with my understanding of the law! The issue before the Court in Leidos is somewhat personal for me (in a professional sense) for a simple reason--a reason consistent with the amicus brief I co-authored on the case. I share that reason briefly here to further illuminate my interest in the case.
In my 15 years of practice before law teaching, I often advised public company issuers on mandatory disclosure documents--periodic filings and offering documents, most commonly. I also counseled investment banks serving as public offering underwriters, placement agents for private securities offerings, and financial advisors in transactions. Even in those days, I was a bit of a rule-head (self-labeled)--a technically engaged legal advisor who tried to stick to the law and regulations, determine their meaning, and implement them consistent with their meaning in practice. I drove colleagues to distraction and boredom, on occasion, with my explanations of the appropriate interpretation of various rules, including specifically mandatory disclosure rules. (This may be why I love the work of the Sustainability Accounting Standards Board, which is looking at mandatory disclosure rules in context.) I teach my students from that same nerdy vantage point.
In advising issuers and others on mandatory disclosure (and in training junior lawyers in the firm), I always noted that facial compliance with the specific line-item disclosure requirements for a Securities and Exchange Commission ("SEC") form is not enough. I advised that two additional legal constraints also govern the appropriate content of the public disclosures required to be made in those forms--constraints that required them to inquire about (among other things) missing information.
- First, I noted the existence of the general misstatements and omissions disclosure (gap-filler) rules under the Securities Act of 1933 or the Securities Exchange Act of 1934, as amended (as applicable in the circumstances)--Rule 408 under the 1933 Act and Rule 12b-20 under the 1934 Act. Each of these rules provides for the disclosure of "such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made not misleading" in addition to the information expressly required to be included in the relevant disclosure document under applicable line-item disclosure rules.
- Second, I noted that anti-fraud law--and, in particular, Section 10(b) of, and Rule 10b-5 under, the 1934 Act--provides an even more comprehensive basis for interrogating the contents of disclosure that facially complies with line-item mandatory disclosure rules. The overall message? No one wants a fraud suit, and if they get one, they should be able to get out of it fast! If a business and its principals were to be sued under Section 10(b) and Rule 10b-5, I wanted to ensure that the relevant disclosures were accurate and complete in all material respects.
Thus, the existence of the line-item and gap-filling disclosure rules--and the potential for fraud liability based on failed compliance with them--are, taken together, important motivators to the best possible disclosure. In my business lawyering, I believe I used these regulatory principles to my clients' advantage. I would hate to see lawyers lose the important leverage that potential fraud liability gives them in fostering accurate and complete disclosures, fully compliant with law. Hence, my position on the Leidos litigation--that mandatory disclosure rules do give rise to a duty to disclose that may form the basis for a securities fraud claim under Section 10(b) and Rule 10b-5. (The ultimate success of any such claim would be, of course, based on the satisfaction of the other elements of a Section 10(b)/Rule 10b-5 claim.)
So, no treat for me--at least not just yet. But perhaps this post will forestall any real trickery--the trickery involved with avoiding securities fraud liability for misleading omissions to state material information expressly required to be stated under line-item mandatory disclosure rules. For me, that is what is at stake in Leidos and in disclosure lawyering generally. Let's see what transpires from here.
Monday, October 16, 2017
Blockchain-Based Token Sales, Initial Coin Offerings, and the Democratization of Public Capital Markets. Oh, My!
My UT Law colleague Jonathan Rohr has coauthored (with Aaron Wright) an important piece of scholarship on an of-the-moment topic--financial instrument offerings using distributed ledger technology. Even more fun? He and his co-author are interested in aspects of this topic at its intersection with the regulation of securities offerings. Totally cool.
Here is the extended abstract. I cannot wait to dig into this one. Can you? As of the time I authored this post, the article already had almost 700 downloads . . . . Join the crowd!
Blockchain-Based Token Sales, Initial Coin Offerings, and the Democratization of Public Capital Markets
Jonathan Rohr & Aaron Wright
Best known for their role in the creation of cryptocurrencies like bitcoin, blockchains are revolutionizing the way tech entrepreneurs are financing their business enterprises. In 2017 alone, over $2.2 billion has been raised through the sale of blockchain-based digital tokens in what some are calling initial coin offerings or “ICOs,” with some sales lasting mere seconds. In a token sale, organizers of a project sell digital tokens to members of the public to finance the development of future technology. An active secondary market for tokens has emerged, with tokens being bought and sold on cryptocurrency exchanges scattered across the globe, with often wild price fluctuations.
The recent explosion of token sales could mark the beginning of a broader shift in public capital markets—one similar to the shift in media distribution that started several decades ago. Blockchains drastically reduce the cost of exchanging value and enable anyone to transmit digitized assets around the globe in a highly trusted manner, stoking dreams of truly global capital markets that leverage the power of a blockchain and the Internet to facilitate capital formation.
The spectacular growth of tokens sales has caused some to argue that these sales simply serve as new tools for hucksters and unscrupulous charlatans to fleece consumers, raising the attention of regulators across the globe. A more careful analysis, however, reveals that blockchain-based tokens represent a wide variety of assets that take a variety of forms. Some are obvious investment vehicles and entitle their holders to economic rights like a share of any profits generated by the project. Others carry with them the right to use and govern the technology that is being developed with funds generated by the token sale and may represent the beginning of a new way to build and fund powerful technological platforms.
Lacking homogeneity, the status of tokens under U.S. securities laws is anything but clear. The test under which security status is assessed—the Howey test—has uncertain application to blockchain-based tokens, particularly those that entitle the holder to use a particular technological service, because they also present the possibility of making a profit by selling the token on a secondary market. Although the SEC recently issued a Report of Investigation in which it found that one type of token qualified as a security, confusion surrounds the boundaries between the types of tokens that will be deemed securities and those that will not.
Blockchain-based tokens exhibit disparate features and have characteristics that make current registration exemptions a poor fit for token sales. In addition to including requirements that do not fit squarely with blockchain-based systems, the transfer restrictions that apply to the most popular exemptions would have the perverse effect of restricting the ability of U.S. consumers to access a new generation of digital technology. The result is an uncertain regulatory environment in which token sellers do not have a sensible path to compliance.
In this Article, we argue that the SEC and Congress should provide token sellers and the exchanges that facilitate token sales with additional certainty. Specifically, we propose that the SEC provide guidance on how it will apply the Howey test to digital tokens, particularly those that mix aspects of consumption and use with the potential for a profit. We also propose that lawmakers adopt both a compliance-driven safe harbor for online exchanges that list tokens with a reasonable belief that the public sale of such tokens is not a violation of Section 5 as well as an exemption to the Section 5 registration requirement that has been tailored to digital tokens.
Wednesday, October 11, 2017
From our friend and BLPB colleague, Anne Tucker, following is nice workshop opportunity for your consideration:
We (Rob Weber & Anne Tucker) are submitting a funding proposal to host a works-in-progress workshop for 4-8 scholars at Georgia State University College of Law, in Atlanta, Georgia in spring 2018 [between April 16th and May 8th]. Workshop participants will submit a 10-15 page treatment and read all participant papers prior to attending the workshop. If our proposal is accepted, we will have funding to sponsor travel and provide meals for participants. Interested parties should email firstname.lastname@example.org on or before November 15th with a short abstract (no more than 500 words) of your proposed contribution that is responsive to the description below. Please include your name, school, and whether you will require airfare, miles reimbursement and/or hotel. We will notify interested parties in late December regarding the funding of the workshop and acceptance of proposals. Please direct all inquiries to Rob Weber (mailto:email@example.com) or Anne Tucker (firstname.lastname@example.org).
Call for Proposals: Organizing, Deploying & Regulating Capital in the U.S.
Our topic description is intentionally broad reflecting our different areas of focus, and hoping to draw a diverse group of participants. Possible topics include, but are not limited to:
- The idea of financial intermediation: regulation of market failures, the continued relevance of the idea of financial intermediation as a framework for thinking about the financial system, and the legitimating role that the intermediation theme-frame plays in the political economy of financial regulation.
- Examining institutional investors as a vehicle for individual investments, block shareholders in the economy, a source of efficiency or inefficiency, an evolving industry with the rise of index funds and ETFs, and targets of SEC liquidity regulations.
- The role and regulation of private equity and hedge funds in U.S. capital markets looking at regulatory efforts, shadow banking concerns, influences in M&A trends, and other sector trends.
This workshop targets works-in-progress and is intended to jump-start your thinking and writing for the 2018 summer. Our goal is to provide comments, direction, and connections early in the writing and research phase rather than polishing completed or nearly completed pieces. Bring your early ideas and your next phase projects. We ask for a 10-15 page treatment of your thesis (three weeks before the workshop) and initial ideas to facilitate feedback, collaboration, and direction from participating in the workshop. Interested parties should email email@example.com on or before November 15th with a short abstract (no more than 500 words) of your proposed contribution that is responsive to the description below. Please include your name, school, and whether you will require airfare, miles reimbursement and/or hotel. We will notify interested parties in late December regarding the funding of the workshop and acceptance of proposals. Please direct all inquiries to Rob Weber (firstname.lastname@example.org) or Anne Tucker (email@example.com).
Anne & Rob
October 11, 2017 in Anne Tucker, Call for Papers, Corporate Finance, Financial Markets, Joshua P. Fershee, Law School, M&A, Research/Scholarhip, Securities Regulation, Writing | Permalink | Comments (0)
Earlier this week, I had the pleasure of hearing a talk about universal proxies from Scott Hirst, Research Director of Harvard’s Program on Institutional Investors.
By way of background, last Fall under the Obama Administration, the SEC proposed a requirement for universal proxies noting:
Today’s proposal recognizes that few shareholders can dedicate the time and resources necessary to attend a company’s meeting in person and that, in the modern marketplace, most voting is done by proxy. This proposal requires a modest change to address this reality. As proposed, each party in a contest still would bear the costs associated with filing its own proxy statement, and with conducting its own independent solicitation. The main difference would be in the form of the proxy card attached to the proxy statement. Subject to certain notice, filing, form, and content requirements, today’s proposal would require each side in a contest for the first time to provide a universal proxy card listing all the candidates up for election.
The Council of Institutional Investors favors their use explaining, “"Universal" proxy cards would let shareowners vote for the nominees they wish to represent them on corporate boards. This is vitally important in proxy contests, when board seats (and in some cases, board control) are at stake. Universal proxy cards would make for a fairer, less cumbersome voting process.”
The U.S. Chamber of Commerce has historically spoken out against them, arguing:
Mandating a universal ballot, also known as a universal proxy card, at all public companies would inevitably increase the frequency and ease of proxy fights. Such a development has no clear benefit to public companies, their shareholders, or other stakeholders. The SEC has historically sought to remain neutral with respect to interactions between public companies and their investors, and has always taken great care not to implement any rule that would favor one side over the other. We do not understand why the SEC would now pursue a policy that would increase the regularity of contested elections or cause greater turnover in the boardroom.
I can't speak for the Chamber, but I imagine one big concern would be whether universal proxies would provide proxy advisors such as ISS and Glass Lewis even more power than they already have with institutional investors. When I asked Hirst about this, he did not believe that the level of influence would rise significantly.
Hirst’s paper provides an empirical study that supports his contention that reform would help mitigate some of the distortions from the current system. It’s worth a read, although he acknowledges that in the current political climate, his proposal will not likely gain much traction. The abstract is below:
Contested director elections are a central feature of the corporate landscape, and underlie shareholder activism. Shareholders vote by unilateral proxies, which prevent them from “mixing and matching” among nominees from either side. The solution is universal proxies. The Securities and Exchange Commission has proposed a universal proxy rule, which has been the subject of heated debate and conflicting claims. This paper provides the first empirical analysis of universal proxies, allowing evaluation of these claims.
The paper’s analysis shows that unilateral proxies can lead to distorted proxy contest outcomes, which disenfranchise shareholders. By removing these distortions, universal proxies would improve corporate suffrage. Empirical analysis shows that distorted proxy contests are a significant problem: 11% of proxy contests at large U.S. corporations between 2001 and 2016 can be expected to have had distorted outcomes. Contrary to the claims of most commentators, removing distortions can most often be expected to favor management nominees, by a significant margin (two-thirds of distorted contests, versus one-third for dissident nominees). A universal proxy rule is therefore unlikely to lead to more proxy contests, or to greater success by special interest groups.
Given that the arguments made against a universal proxy rule are not valid, the SEC should implement proxy regulation. A rule permitting corporations to opt-out of universal proxies would be superior to the SEC’s proposed mandatory rule. If the SEC chooses not to implement a universal proxy regulation, investors could implement universal proxies through private ordering to adopt “nominee consent policies.
Wednesday, October 4, 2017
Yesterday, Professor Bainbridge posted "Is there a case for abolishing derivative litigation? He makes the case as follows:
A radical solution would be elimination of derivative litigation. For lawyers, the idea of a wrong without a legal remedy is so counter-intuitive that it scarcely can be contemplated. Yet, derivative litigation appears to have little if any beneficial accountability effects. On the other side of the equation, derivative litigation is a high cost constraint and infringement upon the board’s authority. If making corporate law consists mainly of balancing the competing claims of accountability and authority, the balance arguably tips against derivative litigation. Note, moreover, that eliminating derivative litigation does not eliminate director accountability. Directors would remain subject to various forms of market discipline, including the important markets for corporate control and employment, proxy contests, and shareholder litigation where the challenged misconduct gives rise to a direct cause of action.
If eliminating derivative litigation seems too extreme, why not allow firms to opt out of the derivative suit process by charter amendment? Virtually all states now allow corporations to adopt charter provisions limiting director and officer liability. If corporate law consists of a set of default rules the parties generally should be free to amend, as we claim, there seems little reason not to expand the liability limitation statutes to allow corporations to opt out of derivative litigation.
I think he makes a good point. And included in the market discipline and other measures that Bainbridge notes would remain in place to maintain director accountability, there would be the shareholder response to the market. That is, if shareholders value derivative litigation as an option ex ante, the entity can choose to include derivative litigation at the outset or to add it later if the directors determine the lack of a derivative suit option is impacting the entity's value.
Professor Bainbridge's post also reminded me of another option: arbitrating derivative suits. A friend of mine made just such a proposal several years ago while we were in law school:
There are a number of factors that make the arbitration of derivative suits desirable. First, the costs of an arbitration proceeding are usually lower than that of a judicial proceeding, due to the reduced discovery costs. By alleviating some of the concern that any D & O insurance coverage will be eaten-up by litigation costs, a corporation should have incentive to defend “frivolous” or “marginal” derivative claims more aggressively. Second, and directly related to litigation costs, attorneys' fees should be cut significantly via the use of arbitration, thus preserving a larger part of any pecuniary award that the corporation is awarded. Third, the reduced incentive of corporations to settle should discourage the initiation of “frivolous” or “marginal” derivative suits.
Andrew J. Sockol, A Natural Evolution: Compulsory Arbitration of Shareholder Derivative Suits in Publicly Traded Corporations, 77 Tul. L. Rev. 1095, 1114 (2003) (footnote omitted).
Given the usually modest benefit of derivative suits, early settlement of meritorious suits, and the ever-present risk of strike suits, these alternatives are well worth considering.
Monday, September 11, 2017
Last Thursday, Jay Brown filed an amicus brief with the U.S. Supreme Court coauthored by him, me, Jim Cox, and Lyman Johnson. The brief was filed in Leidos, Inc., fka SAIC, Inc., Petitioners, v. Indiana Public Retirement System, Indiana State Teachers’ Retirement Fund, and Indiana Public Employees’ Retirement Fund, an omission case brought under Section 10(b) of and Rule 10b-5 under the Securities Exchange Act of 1934, as amended. An abstract of the brief follows.
This Amicus Brief was filed with the U.S. Supreme Court on behalf of nearly 50 law and business faculty in the United States and Canada who have a common interest in ensuring a proper interpretation of the statutory securities regulation framework put in place by the U.S. Congress. Specifically, all amici agree that Item 303 of the Securities and Exchange Commission's Regulation S-K creates a duty to disclose for purposes of Rule 10b-5(b) under the Securities Exchange Act of 1934.
The Court’s affirmation of a duty to disclose would have little effect on existing practice. Under the current state of the law, investors can and do bring fraud claims for nondisclosure of required information by public companies. Thus, affirming the existence of a duty to disclose will not significantly alter existing practices or create a new avenue for litigants that will lead to “massive liability” or widespread enforcement of “technical reporting violations.”
At the same time, the failure to find a duty to disclose in these circumstances will hinder enforcement of the system of mandatory reporting applicable to public companies and weaken compliance. Reversal of the lower court would reduce incentives to comply with the requirements mandated by the system of periodic reporting. Enforcement under Section 10(b) of and Rule 10b-5(b) under the Securities Exchange Act of 1934 by investors in the case of nondisclosure will effectively be eliminated. Reversal would likewise reduce the tools available to the Securities and Exchange Commission to ensure compliance with the system of periodic reporting. In an environment of diminished enforcement, reporting companies could perceive their disclosure obligations less as a mandate than as a series of options. Required disclosure would more often become a matter of strategy, with issuers weighing the obligation to disclose against the likelihood of detection and the reduced risk of enforcement.
Under this approach, investors would not make investment decisions on the basis of “true and accurate corporate reporting. . . .” They would operate under the “predictable inference” that reports included the disclosure mandated by the rules and regulations of the Securities and Exchange Commission. Particularly where officers certified the accuracy and completeness of the information provided in the reports, investors would have an explicit basis for the assumption. They would therefore believe that omitted transactions, uncertainties, and trends otherwise required to be disclosed had not occurred or did not exist. Trust in the integrity of the public disclosure system would decline.
The lower court correctly recognized that the mandatory disclosure requirements contained in Item 303 gave rise to a duty to disclose and that the omission of material trends and uncertainties could mislead investors. The decision below should be affirmed.
More information about the case (including the parties' briefs and all of the amicus briefs) can be found here. The link to our brief is not yet posted there but likely will be available in the next few days. Also, I commend to you Ann Lipton's earlier post here about the circuit split on the duty to disclose issue up for review in Leidos.
Imv, this is a great case for discussion in a Securities Regulation course. It involves mandatory disclosure rules, fraud liability, and class action gatekeeping. As such, it allows for an exploration of core regulatory and enforcement tools of federal securities regulation.
Sunday, August 6, 2017
My latest paper, The Inclusive Capitalism Shareholder Proposal, 17 U.C. Davis Bus. L.J. 147 (2017), is now available on Westlaw. Here is the abstract:
When it comes to the long-term well being of our society, it is difficult to overstate the importance of addressing poverty and economic inequality. In Capital in the Twenty-First Century, Thomas Piketty famously argued that growing economic inequality is inherent in capitalist systems because the return to capital inevitably exceeds the national growth rate. Proponents of “Inclusive Capitalism” can be understood to respond to this issue by advocating for broadening the distribution of the acquisition of capital with the earnings of capital. This paper advances the relevant discussion by explaining how shareholder proposals may be used to increase understanding of Inclusive Capitalism, and thereby further the likelihood that Inclusive Capitalism will be implemented. In addition, even if the suggested proposals are rejected, the shareholder proposal process can be expected to facilitate a better understanding of the strengths and weaknesses of Inclusive Capitalism, as well as foster useful new lines of communication for addressing both poverty and economic inequality.
August 6, 2017 in Corporate Finance, Corporate Governance, CSR, Financial Markets, Research/Scholarhip, Securities Regulation, Shareholders, Social Enterprise, Stefan J. Padfield | Permalink | Comments (0)
Saturday, August 5, 2017
I have been at the Southeastern Association of Law Schools (SEALS) conference all week. As usual, there have been too many program offerings important to my scholarship and teaching. I have participated in and attended so many things. I am exhausted.
But I know that all of this activity also energizes me. Once I am back at home tomorrow night and get a good night's sleep, I will be ready to rock and roll into the new academic year (which starts for us at UT Law in a few weeks). I use the SEALS conference as this bridge to the new year every summer.
One of my favorite discussion groups at the conference was the White Collar Crime discussion group that John Anderson and I organized. A number of us focused on insider trading law this year. John, for example, shared his preliminary draft of an insider trading statute. I asked folks to ponder the result under U.S. insider trading law of a tipping case with the following general facts:
- A person with a fiduciary duty of trust and confidence to a principal conveys material nonpublic information obtained through the fiduciary relationship to a third person;
- The recipient of the information is someone with whom the fiduciary has no prior familial or friendship relationship;
- The conveyance is made to the recipient by the fiduciary without the consent of the principal;
- The conveyance is made to the recipient gratuitously;
- The fiduciary’s purpose in conveying the information is to benefit the recipient;
- Specifically, the fiduciary knows that the recipient has the ability and incentive to trade on the information or convey it to others who have the ability and incentive to trade; and
- The fiduciary has clear knowledge and understanding of resulting detriment to the principal.
The question, of course, is whether the fiduciary has engaged in deception that constitutes a willful violation of insider trading proscriptions under Section 10(b) and Rule 10b-5. The answer, based on what we now know under U.S. insider trading law, depends on whether the fiduciary's sharing of information is improper. What do you think? I shared my views and others in the group shared theirs. I may have more to say on this problem and my related work in a later post.
Wednesday, July 19, 2017
Last year, I was asked to contribute to a symposium on law and entrepreneurship hosted at the University of North Carolina. Although I had to Skype in for my presentation from Little Rock, Arkansas (where I had just given a separate, unrelated CLE presentation), the panel to which I was assigned was fabulous. Great scholars, with great ideas.
For my contribution to the symposium, I chose to reflect on the unfulfilled promise of the potentially mutually beneficial relationship between an entrepreneur and a business finance lawyer. I recently posted the published work memorializing my thoughts on the topic, featured this spring with several other articles from the symposium in a dedicated edition of the North Carolina Law Review. The brief abstract for my article follows:
Entrepreneurs have the capacity to add value to the economy and the community. Business lawyers—including business finance lawyers—want to help entrepreneurs achieve their objectives. Despite incentives to a symbiotic relationship, however, entrepreneurs and business finance lawyers are not always the best of friends. This Article offers several approaches to bridging this gap between entrepreneurs and business finance lawyers.
My hope in writing this article was to infuse some energy into conversations about the role of business finance and business finance lawyers in the start-up and small business environment. Too many principals of emergent businesses with whom I interact think that business entity choice and formation are divorced--wholly or in major part--from finance. Of course, governance and tax matters (as well as, e.g., intellectual property and employment law concerns) are key. But my personal view is that entrepreneurs and promoters of new businesses should map out their plan for financing firms from the start and take that plan into account in choosing the form of legal entity for those businesses. I may be fighting an uphill battle on this (for a variety of reasons, mostly relating to the limited resource environment in which start-ups and small businesses exist), but I hope the article gives both clients and lawyers in this space something to consider, at the very least.
Friday, July 7, 2017
Bernard Sharfman has written another interesting article on shareholder empowerment. I wish I had read A Private Ordering Defense of a Company's Right to Use Dual Class Share Structures in IPOs before I discussed the Snap IPO last semester in business associations.
The abstract is below:
The shareholder empowerment movement (movement) has renewed its effort to eliminate, restrict or at the very least discourage the use of dual class share structures in initial public offerings (IPOs). This renewed effort was triggered by the recent Snap Inc. IPO that utilized non-voting stock. Such advocacy, if successful, would not be trivial, as many of our most valuable and dynamic companies, including Alphabet (Google) and Facebook, have gone public by offering shares with unequal voting rights.
This Article utilizes Zohar Goshen and Richard Squire’s “principal-cost theory” to argue that the use of the dual class share structure in IPOs is a value enhancing result of the bargaining that takes place in the private ordering of corporate governance arrangements, making the movement’s renewed advocacy unwarranted.
As he has concluded:
It is important to understand that while excellent arguments can be made that the private ordering of dual class share structures must incorporate certain provisions, such as sunset provisions, it is an overreach for academics and shareholder activists to dictate to sophisticated capital market participants, the ones who actually take the financial risk of investing in IPOs, including those with dual class share structures, how to structure corporate governance arrangements. Obviously, all the sophisticated players in the capital markets who participate in an IPO with dual class shares can read the latest academic articles on dual class share structures, including the excellent new article by Lucian Bebchuk and Kobi Kastiel, and incorporate that information in the bargaining process without being dictated to by parties who are not involved in the process. If, as a result of this bargaining, the dual class share structure has no sunset provision and perhaps even no voting rights in the shares offered, then we must conclude that these terms were what the parties required in order to get the deal done, with the risks of the structure being well understood.… capital markets paternalism is not required when it comes to IPOs with dual class share structures.
Please be sure to share your comments with Bernard below.
Tuesday, June 6, 2017
More than two years ago, I posted Shareholder Activists Can Add Value and Still Be Wrong, where I explained my view on shareholder proposals:
I have no problem with shareholders seeking to impose their will on the board of the companies in which they hold stock. I don't see activist shareholder as an inherently bad thing. I do, however, think it's bad when boards succumb to the whims of activist shareholders just to make the problem go away. Boards are well served to review serious requests of all shareholders, but the board should be deciding how best to direct the company. It's why we call them directors.
Today, the Detroit Free Press reported that shareholders of automaker GM soundly defeated a proposal from billionaire investor David Einhorn that would have installed an alternate slate of board nominees and created two classes of stock. (All the proposals are available here.) Shareholders who voted were against the proposals by more than 91%. GM's board, in materials signed by Mary Barra, Chairman & Chief Executive Officer and Theodore Solso, Independent Lead Director, launched an aggressive campaign to maintain the existing board (PDF here) and the split shares proposal (PDF here). GM argued in the board maintenance piece:
Greenlight’s Dividend Shares proposal has the potential to disrupt our progress and undermine our performance. In our view, a vote for any of the Greenlight candidates would represent an endorsement of that high-risk proposal to the detriment of your GM investment.
Another shareholder proposal asking the board to separate the board chair and CEO positions was reported by the newspaper as follows: "A separate shareholder proposal that would have forced GM to separate the role of independent board chairman and CEO was defeated by shareholders." Not sure. Though the proposal was defeated, it's worth noting that the proposal would not have "forced" anything. The proposal was an "advisory shareholder proposal" requesting the separation of the functions. No mandate here, because such decisions must be made by the board, not the shareholders. The proposal stated:
Shareholders request our Board of Directors to adopt as policy, and amend our governing documents as necessary, to require the Chair of the Board of Directors, whenever possible, to be an independent member of the Board. The Board would have the discretion to phase in this policy for the next CEO transition, implemented so it did not violate any existing agreement. If the Board determines that a Chair who was independent when selected is no longer independent, the Board shall select a new Chair who satisfies the requirements of the policy within a reasonable amount of time. Compliance with this policy is waived if no independent director is available and willing to serve as Chair. This proposal requests that all the necessary steps be taken to accomplish the above.
GM argued against this proposal because the "policy advocated by this proposal would take away the Board’s discretion to evaluate and change its leadership structure." Also not true. It the proposal were mandatory, then this would be true, but as a request, it cannot and could not take away anything. If the shareholders made such a request and the board declined to follow that request, there might be repercussions for doing so, but the proposal would have kept in place the "Board’s discretion to evaluate and change its leadership structure."
These proposals appear to have been properly brought, properly considered, and properly rejected. As I suggested in 2015, shareholder activists can help improve long-term value, even when following the activists' proposals would not. That is just as true today and these proposals may well prime the pumpTM for future board or shareholder actions. That is, GM has conceded that its stock is undervalued and that change is needed. GM argues those changes are underway, and for now, most voting shareholder agree. But we'll see how this looks if the stock price has not noticeably improved next year. An alternative path forward on some key issues has been shared, and that puts pressure on this board to deliver. They can do it their own way, but they are on notice that there are alternatives. An shareholders now know that, too.
This knowledge underscores the value of shareholder proposals as a process. They can and should create accountability, and that is a good thing. I agree with GM that the board should keep control of how it structures the GM leadership team. But I agree with the shareholders that if this board doesn't perform, it may well be time for a change.
June 6, 2017 in Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Joshua P. Fershee, Management, Securities Regulation, Shareholders | Permalink | Comments (0)
Saturday, May 20, 2017
Loyalty has been in the news lately. The POTUS, according to some reports, asked former Federal Bureau of Investigation ("FBI") Director James Comey to pledge his loyalty. Assuming the basic veracity of those reports, was the POTUS referring to loyalty to the country or to him personally? Perhaps both and perhaps, as Peter Beinart avers in The Atlantic, the POTUS and others fail to recognize a distinction between the two. Yet, identifying the object of a duty can be important.
I have observed that the duty of government officials is not well understood in the public realm. Donna Nagy's fine work on this issue in connection with the proposal of the Stop Trading on Congressional Knowledge ("STOCK") Act, later adopted by Congress, outlines a number of ways in which Congressmen and Senators, among others, may owe fiduciary duties to others. If you have not yet been introduced to this scholarship, I highly recommend it. If we believe that government officials are entrusted with information, among other things, in their capacity as public servants, they owe duties to the government and its citizens to use that information in authorized ways for the benefit of that government and those citizens. In fact, Professor Nagy's congressional testimony as part of the hearings on the STOCK Act includes the following in this regard:
Given the Constitution's repeated reference to public offices being “of trust,” and Members’ oath of office to “faithfully discharge” their duties, I would predict that a court would be highly likely to find that Representatives and Senators owe fiduciary-like duties of trust and confidence to a host of parties who may be regarded as the source of material nonpublic congressional knowledge. Such duties of trust and confidence may be owed to, among others:
- the citizen-investors they serve;
- the United States;
- the general public;
- Congress, as well as the Senate or the House;
- other Members of Congress; and
- federal officials outside of Congress who rely on a Member’s loyalty and integrity.
There is precious little in federal statutes, regulations, and case law on the nature--no less the object--of any fiduciary the Director of the FBI may have. The authorizing statute and regulations provide little illumination. Federal court opinions give us little more. See, e.g., Banks v. Francis, No. 2:15-CV-1400, 2015 WL 9694627, at *3 (W.D. Pa. Dec. 18, 2015), report and recommendation adopted, No. CV 15-1400, 2016 WL 110020 (W.D. Pa. Jan. 11, 2016) ("Plaintiff does not identify any specific, mandatory duty that the federal officials — Defendants Hornak, Brennan, and the FBI Director— violated; he merely refers to an overly broad duty to uphold the U.S. Constitution and to see justice done."). Accordingly, any applicable fiduciary duty likely would arise out of agency or other common law. Section 8.01 of the Restatement (Third) of Agency provides "An agent has a fiduciary duty to act loyally for the principal's benefit in all matters connect with the agency relationship."
But who is the principal in any divined agency relationship involving the FBI Director?
Monday, May 1, 2017
A bit more than a year ago, I had the opportunity to participate in a conference on corporate criminal liability at the Stetson University College of Law. The short papers from the conference were published in a subsequent issue of the Stetson Law Review. This was the second time that Ellen Podgor, a friend and white collar crime scholar on the Stetson Law faculty, invited me to produce a short work on corporate criminal liability for publication in a dedicated edition of the Stetson Law Review. (The first piece I published in the Stetson Law Review reflected on corporate personhood in the wake of the U.S. Supreme Court's Citizen's United opinion. It has been downloaded and cited a surprising number of times. So, I welcomed the opportunity to publish with the law review a second time.)
For the 2016 conference, I chose to focus on the reckless conduct of employees and its capacity to generate corporate criminal insider trading liability for the employer. The abstract for the resulting paper, (Not) Holding Firms Criminally Responsible for the Reckless Insider Trading of their Employees (recently posted to SSRN), is as follows:
Criminal enforcement of the insider trading prohibitions under Section 10(b) and Rule 10b–5 is the root of corporate criminal liability for insider trading in the United States. In the wake of assertions that S.A.C. Capital Advisors, L.P. actively encouraged the unlawful use of material nonpublic information in the conduct of its business, the line between employer and employee criminal liability for insider trading becomes both tenuous and salient. An essential question emerges: when do we criminally prosecute the firm for the unlawful conduct of its employees?
The possibility that reckless employee conduct may result in the employer's willful violation of Section 10(b) and Rule 10b–5 (and, therefore, criminal liability for that employer firm) motivates this article. The article first reviews the basis for criminal enforcement of the insider trading prohibitions established in Section 10(b) and Rule 10b–5 and describes the basis and rationale for corporate criminal liability (a liability that derives from the activities of agents undertaken in the course of the firm’s business). Then, it reflects on that basis and rationale by identifying the potential for corporate criminal liability for the reckless insider trading violations of employees under Section 10(b) and Rule 10b–5, arguing against that liability, and suggesting ways to eliminate it.
I was not the only conference participant concerned about the criminal liability of an employer for the insider trading conduct of an employee. John Anderson, who co-led an insider trading discussion group with me at the 2017 Association of American Law Schools annual meeting back in January and also enjoys exploring criminal insider trading issues, contributed his research on the overcriminalization of insider trading at the conference. His paper, When Does Corporate Criminal Liability for Insider Trading Make Sense?, identifies the same overall problem as my article does (employer criminal liability for insider trading based on employee conduct). However, he views both the problem and the potential solutions more broadly.
Wednesday, April 26, 2017
Last week, a reporter interviewed me regarding conflict minerals.The reporter specifically asked whether I believed there would be more litigation on conflict minerals and whether the SEC's lack of enforcement would cause companies to stop doing due diligence. I am not sure which, if any, of my remarks will appear in print so I am posting some of my comments below:
Just today, the GAO issued a report on conflict minerals. Dodd-Frank requires an annual report on the effectiveness of the rule "in promoting peace and security in the DRC and adjoining countries." Of note, the report explained that:
After conducting due diligence, an estimated 39 percent of the companies reported in 2016 that they were able to determine that their conflict minerals came from covered countries or from scrap or recycled sources, compared with 23 percent in 2015. Almost all of the companies that reported conducting due diligence in 2016 reported that they could not determine whether the conflict minerals financed or benefited armed groups, as in 2015 and 2014. (emphasis added).
The Trump Administration, some SEC commissioners, and many in Congress have already voiced their concerns about this legislation. I didn't have the benefit of the GAO report during my interview, but it will likely provide another nail in the coffin of the conflict minerals rule.
April 26, 2017 in Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Human Rights, International Law, Legislation, Marcia Narine Weldon, Securities Regulation | Permalink | Comments (1)
Monday, April 24, 2017
As a business lawyer in private practice, I found it very frustrating when the principals of business entity clients acted in contravention of my advice. This didn't happen too often in my 15 years of practice. But when it did, I always wondered whether I could have stopped the madness by doing something differently in my representation of the client.
Thanks to friend and Wayne State University Law School law professor Peter Henning, who often writes on insider trading and other white collar crime issues for the New York Times DealBook (see, e.g., this recent piece), I had the opportunity to revisit this issue through my research and present that research at a symposium at Wayne Law back in the fall of 2015. The law review recently published the resulting short article, which I have posted to SSRN. The abstract is set forth below.
Sometimes, business entity clients and their principals do not seek, accept, or heed the advice of their lawyers. In fact, sometimes, they expressly disregard a lawyer’s instructions on how to proceed. In certain cases, the client expressly rejects the lawyer’s advice. However, some business constituents who take action contrary to the advice of legal counsel may fall out of compliance incrementally over time or signal compliance and yet (paradoxically) act in a noncompliant manner. These seemingly ineffectual varieties of the lawyer/client relationship are frustrating to the lawyer.
This short article aims to explain why representatives of business entities who consider themselves law-abiding and ethical may nevertheless act in contravention of the business’s legal counsel and offers preliminary means of addressing the proffered reasons for these compliance failures. The article does not address willful noncompliance or even willful blindness. Rather, it makes observations about behavior that falls squarely into what the law typically recognizes as recklessness. An apocryphal lawyer-client story relating to insider trading compliance provides foundational context.
The exemplar story derives from things I witnessed in law practice. Perhaps some of you also have experienced clients or business entity client principals which/who act contrary to your advice in similar ways. Regardless, you may find this short piece of interest.
Wednesday, March 22, 2017
What does the EU know that the U.S. Doesn’t About the Effectiveness of Conflict Minerals Legislation?
Earlier this month, the EU announced plans to implement its version of conflict minerals legislation, which covers all “conflict-affected and high-risk areas” around the world. Once approved by the Council of the EU, the law will apply to all importers into the EU of minerals or metals containing or consisting of tin, tantalum, tungsten, or gold (with some exceptions). Compliance and reporting will begin in January 2021. Importers must use OECD due diligence standards, report on their progress to suppliers and the public, and use independent third-party auditors. President Trump has not yet issued an executive order on Dodd-Frank §1502, aka conflict minerals, but based on a leaked memo, observers believe that it's just a matter of time before that law is repealed here in the U.S. So why is there a difference in approach?
In response to a request for comments from the SEC, the U.S Chamber of Commerce, which led the legal battle against §1502, claimed, “substantial evidence shows that the conflict minerals rule has exacerbated the humanitarian crisis on the ground in the Democratic Republic of the Congo…The reports public companies are mandated to file also contribute to ―information overload and create further disincentives for businesses to go public or remain public companies. Accordingly, the Chamber strongly supports Congressional repeal of Section 1502 due to its all-advised and fundamentally flawed approach to solving a geopolitical crisis, and the substantial burden it imposes upon public companies and their shareholders.”
The Enough Project, which spearheaded the passage of §1502, submitted an eight-page statement to the SEC last month stating, among other things, that they “strongly oppose any suspension, weakening, or repeal of the current Conflict Minerals Rule, and urge the SEC to increase enforcement of the Rule….The Rule has led to improvements in the rule of law in the mining sectors of Congo, Rwanda, and other Great Lakes countries, contributed to improvements in humanitarian conditions in Congo and a weakening of key insurgent groups, and resulted in tangible benefits for U.S. corporations and their supply chains.”
I agree that the Rule has led to increased transparency and efficiency in supply chains (although some would differ), and less armed control of mines. But I’m not sure that the overall human rights conditions have improved as significantly as §1502’s advocates (and I) would have liked.
As Amnesty International’s 2016/2017 report on DRC explains in graphic detail, “armed groups committed a wide range of abuses including: summary executions; abductions; cruel, inhuman and degrading treatment; rape and other sexual violence; and the looting of civilian property... various ... armed groups (local and community-based militias) were among those responsible for abuses against civilians. The Lord’s Resistance Army (LRA) continued to be active and commit abuses in areas bordering South Sudan and the Central African Republic. In… North Kivu, civilians were massacred, usually by machetes, hoes and axes. On the night of 13 August, 46 people were killed … by suspected members of the Allied Democratic Forces (ADF), an armed group from Uganda that maintains bases in eastern DRC…Hundreds of women and girls were subjected to sexual violence in conflict-affected areas. Perpetrators included soldiers and other state agents, as well as combatants of armed groups…Hundreds of children were recruited by armed groups...”
Human Rights Watch’s 2017 report isn’t any better. According to HRW, “dozens of armed groups remained active in eastern Congo. Many of their commanders have been implicated in war crimes, including ethnic massacres, killing of civilians, rape, forced recruitment of children, and pillage. In … North Kivu, unidentified fighters continued to commit large-scale attacks on civilians, killing more than 150 people in 2016 … At least 680 people have been killed since the beginning of the series of massacres in October 2014. There are credible reports that elements of the Congolese army were involved in the planning and execution of some of these killings. Intercommunal violence increased as fighters … carried out ethnically based attacks on civilians, killing at least 170 people and burning at least 2,200 homes.
Finally, according to a February 17, 2017 statement from the Trump Administration, “the United States is deeply concerned by video footage that appears to show elements of the armed forces of the Democratic Republic of Congo summarily executing civilians, including women and children. Such extrajudicial killing, if confirmed, would constitute gross violations of human rights and threatens to incite widespread violence and instability in an already fragile country. We call upon the Government of the Democratic Republic of Congo to launch an immediate and thorough investigation, in collaboration with international organizations responsible for monitoring human rights, to identify those who perpetrated such heinous abuses, and to hold accountable any individual proven to have been involved.”
Most Americans have no idea of the atrocities occurring in DRC or other conflict zones around the world. I have spent the past few years researching business and human rights, particularly in conflict zones in Latin America and Africa. I filed an amicus brief in 2013 and have written and blogged about the failure of disclosure regimes a dozen times because I don’t believe that name and shame laws stop the murder, rape, conscription of child soldiers, and the degradation of innocent people. I applaud the EU and all of the NGOs that have attempted to solve this intractable problem. But it doesn't seem that enough has changed since my visit to DRC in 2011 where I personally saw 5 massacre victims in the road on the way to visit a mine, and met with rape survivors, village chiefs, doctors, members of the clergy and others who pleaded for help from the U.S. Unfortunately, I don’t think this legislation has worked. Ironically, the U.S. and EU legislation go too far and not far enough. I hope that if the U.S. and EU focus on a more holistic, well-reasoned geopolitical solution with NGOS, stakeholders, and business.
Monday, March 13, 2017
As you may know, I have had an abiding curiosity about the line between the U.S private and public securities markets in large part because of my work on crowdfunding. Almost three years ago, I published a post on the topic here at the BLPB. I posted on the referenced paper here. That paper recently was republished in a slightly updated form by The Texas Journal of Business Law, the official publication of the Business Law Section of the State Bar of Texas (available here).
As a result of this work, my interest was (perhaps unsurprisingly) piqued by a this paper by Amy and Bert Westbrook. Enticingly titled "Unicorns, Guardians, and the Concentration of the U.S. Equity Markets," the article documents concentrations in both private and public equity markets in the United States and makes a number of interesting observations. I was especially intrigued by the article's identification of a potential resulting peril of this market concentration: the aggregation of both corporate management and ownership in the hands of the few.
[W]ealth has concentrated and private equity markets have emerged that serve as alternatives to the public equity market. At the same time, the public equity market has become dominated by highly concentrated shareholding, in the form of institutional investors, especially index funds, and the occasional founder. Both developments have resulted in concentrations of capital that mirror the concentration of management that concerned Berle and Means. For Berle and Means, the concern was concentrated management and dispersed ownership. The concern now is that both management and ownership are concentrated in the hands of very few people.
Very interesting . . . . And this is only one of the conclusions that the authors draw. As a foundation for its assertions, the article documents the concentration of ownership in both private and public markets, tying current participation in both markets back to salient economic and social data and trends. The full abstract from SSRN is set forth below, for your convenience.
Developments in the private and public equity markets are changing the role equity investment plays in the United States, and therefore what "stock market" means as a matter of political economy. During the 20th century, securities and other laws did much to tame the "animal spirits" of industrial capitalism, epitomized by the "Robber Barons." In order to raise large sums, businesses offered stock to the public, thereby subjecting themselves to the securities laws. Compliance required not only disclosure, transparency, but more subtly, that the firms themselves undergo a process of Weberian rationalization. A relatively broad middle class was comfortable investing in such corporations, and the governance of firms and thus much of the economy was understood to be answerable to this class. Citizens understood such arrangements as theirs, part of "the American way."
In recent years, in conjunction with rising inequality in the United States, there has been a decisive shift from broad-based ownership of firms to much more concentrated forms of ownership in both private and public markets. Private equity markets are concentrated by legal definition: relatively few people are qualified to participate directly. Yet private equity has become the preferred method of capital formation, epitomized by "unicorns," firms valued at over $1 billion without being publicly traded. Public equity markets are dominated by funds with trillions of dollars under management, and small staffs, who are in effect "guardians" for the portfolios that ensure long-term stability for individuals and institutions, notably through retirement and endowments. The governance of the U.S. economy has to a surprising degree become a matter of grace: the nation now relies on a small elite to make good decisions on its behalf about the allocation of capital, the governance of firms, and the preservation of portfolio value. This consolidation of ownership rivals that of the late 19th century, and may challenge the law to address the equity markets in new ways.
I think you'll enjoy this one. At the very least, it's a great read for those of you who, like me, are interested in analyses of the U.S securities markets. But perhaps more broadly, with contentious changes in federal business regulation in the offing under the current administration in Washington, this work should contribute meaningfully to the debate.
Thursday, March 9, 2017
In 2016, the Securities and Exchange Commission (SEC) for the first time sought public comment on whether financial disclosure reform should address indicators of firms’ sustainability risks and practices. Securities disclosure reform now appears poised to take a deregulatory turn, and innovations at the intersection of sustainability and finance appear unlikely in the face of new policy priorities. Whether the SEC should take any steps to improve how sustainability-related information is disclosed to investors is also deeply contested.
This Article argues that the SEC nonetheless faces a sustainability imperative, first to address this issue in the near term as part of its ongoing review of the reporting framework for financial disclosure, and second, to promote disclosure of material sustainability information within financial reports in furtherance of its core statutory mandate. This conclusion rests on evidence that the current state of sustainability disclosure is inadequate for investment analysis and that these deficiencies are largely problems of comparability and quality, which cannot readily be addressed by private ordering, nor by deference to policymaking at the state level. This Article highlights the costs of agency inaction that have been largely ignored in the debate over the future of financial reporting and concludes by weighing potential avenues for disclosure reform and their alternatives.
Monday, March 6, 2017
Most of us editors here at the Business Law Prof Blog obsess and blog in one way or another about disclosure issues. Marcia has written passionately about conflict minerals disclosure (see a recent post here) and the SEC's efforts to revamp--or at least reconsider--Regulation S-K (including here). Anne also wrote about the Regulation S-K revision efforts here. Ann wrote about mining industry disclosures here and focuses ongoing attention on securities litigation issues in the disclosure realm (including, e.g. here). Josh wrote about the intersection of corporate governance and disclosure regulation in this post. I have written about "disclosure creep" here and most of my research and writing has a disclosure bent to it, one way or another . . . .
Last summer, at the National Business Law Scholars Conference at The University of Chicago Law School, I listened with some fascination to the presentation of an early-stage project by Todd Henderson (whose work always makes me think--and this was no exception). His thesis¹ was a deceptively simple one: that the age-old disclosure debate could best be solved by creating a contextual market for disclosure (rather than by, e.g., continuing its the current system of "federal government mandates and issuer pays" or leaving market participants to their own devices as to what to disclose and punishing malfeasance merely through fraud and misstatement liability or state sanctions). The paper resulting from that presentation, coauthored by Todd and Kevin Haeberle from the University of South Carolina School of Law (but moving to William & Mary Law School in July), has recently been released on SSRN. The title of the piece is Making a Market for Corporate Disclosure, and here's the abstract:
One of the core problems that law seeks to address relates to the sub-optimal production and sharing of information. The problem manifests itself throughout the law — from the basic contracts, torts, and constitutional law settings through that of food and drug, national security, and intellectual property law. Debates as to how to best ameliorate these problems are often contentious, with those on one end of the political spectrum preferring strong government intervention and those on the other calling for market forces to be left alone to work.
When it comes to the generation and release of the information with the most value for the economy (public-company information), those in favor of the command-and-control approach have long had their way. Exhibit A comes in the form of the mandatory-disclosure regime around which so much of corporate and securities law centers. But this approach merely leaves those who value corporate information with the government’s best guess as to what they want. A number of fixes have been offered, ranging from more of the same (adding to the 100-plus-page list of what firms must disclose based on the latest Washington fad), to the radical (dump the federal regime and its fraud and insider-trading overlays altogether in favor of state-level regulation). This Article, however, offers an innovative approach that falls in middle of the traditional spectrum: Make relatively small changes to the law to allow a market for tiered access to disclosures, thereby allowing firm supply and information-consumer demand to interact in a way that would motivate better disclosure. Thus, we propose a market for corporate disclosure — and explains its appeal.
I have skimmed the article and am looking forward to reading it in full over my spring break in a week's time. I write here to encourage you to make time in your day/week/month to read it too--and to consider both the critiques of federally mandated disclosure and the article's response to those critiques. I am confident that the thinking it will make me do (again) will sharpen my teaching and scholarship; it might just do the same for you . . . .
¹ After publishing this post, I learned that the paper actually was drafted by Kevin well before Todd presented it last summer. My apologies to Kevin for leaving him out of this part of the story! :>)