Wednesday, November 19, 2014
In June 2014, the Supreme Court decided Fifth Third Bancorp v. Dudenhoeffer holding that fiduciaries of a retirement plan with required company stock holdings (an ESOP) are not entitled to any prudence presumption when deciding not to dispose of the plan’s employer stock. The presumption in question was referred to as the Moench presumption and had been adopted in several circuits. You may have heard of these cases as the stock drop cases, as in the company stock price crashed and the employee/investors sue the retirement plan fiduciaries for not selling the stock. The Supreme Court opinion didn’t throw open the courthouse doors for all jilted retirement investors, and limited recovery to complaints (1) alleging that the mispricing was based on something more than publically available information, and also (2) identifying an alternative action that the fiduciary could have taken without violating insider trading laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.
The Supreme Court in Fifth Third recognized the required interplay between ERISA and securities laws stating:
[W]here a complaint faults fiduciaries for failing to decide, based on negative inside information, to refrain from making additional stock purchases or for failing to publicly disclose that information so that the stock would no longer be overvalued, courts should consider the extent to which imposing an ERISA-based obligation either to refrain from making a planned trade or to disclose inside information to the public could conflict with the complex insider trading and corporate disclosure requirements set forth by the federal securities laws or with the objectives of those laws.
The Ninth Circuit decided Harris v. Amgen in October based upon the Fifth Third decision. In Harris, the plaintiffs’ claim alleged a breach of fiduciary duty based on the failure to stop buying additional stock in the ESOP based on non-public information. The Ninth Circuit found that plaintiffs alleged sufficient facts to withstand a motion to dismiss that defendant fiduciaries were aware (1) of non-public information, which would have affected the market price of the company stock and (2) the stock price was inflated. These same facts supported a simultaneously-filed securities class action case.
To understand the interplay between securities laws and ERISA fiduciary rules, as established in Fifth Third, one ERISA consulting firm observed that
The Ninth Circuit appeared to reach the conclusion that, if ‘regular investors’ can bring an action under the securities laws based on the failure to disclose material information, then ‘ERISA investors’ in an ERISA-covered plan may, based on the same facts, bring an action under ERISA:
"If the alleged misrepresentations and omissions, scienter, and resulting decline in share price ... were sufficient to state a claim that defendants violated their duties under [applicable federal securities laws], the alleged misrepresentations and omissions, scienter, and resulting decline in share price in this case are sufficient to state a claim that defendants violated their more stringent duty of care under ERISA."
The Harris opinion invokes a sort of chicken and egg problem. If the plan had dumped the stock it would have signaled to the market and pushed the share prices lower. In addressing this concern, however, the Ninth Circuit stated that:
Based on the allegations in the complaint, it is at least plausible that defendants could have removed the Amgen Stock Fund from the list of investment options available to the plans without causing undue harm to plan participants.
. . . The efficient market hypothesis ordinarily applied in stock fraud cases suggests that the ultimate decline in price would have been no more than the amount by which the price was artificially inflated. Further, once the Fund was removed as an investment option, plan participants would have been protected from making additional purchases of the Fund while the price of Amgen shares remained artificially inflated. Finally, the defendants' fiduciary obligation to remove the Fund as an investment option was triggered as soon as they knew or should have known that Amgen's share price was artificially inflated. That is, defendants began violating their fiduciary duties under ERISA by continuing to authorize purchases of Amgen shares at more or less the same time some of the defendants began violating the federal securities laws.
The argument, in part, is that if Amgen had stopped the ESOP stock purchases it would have signaled to the market regarding price inflation and perhaps prevented the basis for the securities fraud violations harm alleged in the separate suit.
For those who follow securities litigation, there is a potential for investors purchasing in an ESOP to have a secondary and perhaps superior claim for fiduciary duty violations based upon the same facts giving rise to company stock mispricing arising under securities laws.
This raises the question, as one ERISA consulting firm noted,
Are an issuer/plan fiduciary's disclosure obligations to participants greater than its disclosure obligations to mere shareholders? Isn't that letting the ERISA-disclosure tail wag the securities law-disclosure dog – will it not result in the announcement of market-moving material information to plan participants first, before it is announced to securities buyers-and-sellers generally?
I have long been interested in how what happens in the defined contribution (DC) context intersects with what we think of traditional corporate law and how, as the pool of DC investors grows, there will be an ever increasing influence of the DC investor in the corporate law arena.
Monday, November 17, 2014
Regular readers of this column know that I’m a strong supporter of a federal crowdfunding exemption, which would allow companies to sell securities online to ordinary investors without registration.
The SEC’s Foot-Dragging
The JOBS Act, passed in April 2012, included a crowdfunding exemption, but, 956 days later, the SEC still has not adopted rules to implement it. Last month, I complained about the SEC’s failure to adopt those rules. Now, I’m not so sure I want that to happen.
A Little Legislative History
Why have I changed my mind? First, a little legislative history. The House originally passed a crowdfunding bill, sponsored by Representative Patrick McHenry, that was much less regulatory than the final law. Unfortunately, the Senate amended the JOBS Act to substitute the version that was eventually enacted into law. That final version is much more regulatory than Congressman McHenry’s version, and is riddled with errors and ambiguities. The House accepted that Senate substitution, probably because fighting would have risked everything else in the JOBS Act.
As I wrote shortly after the JOBS Act passed, the exemption that came out of the Senate is flawed and unlikely to be effective. If so, it’s not the SEC’s fault. The SEC has limited discretion to fix the problems in the statute.
A Better Way
Things have changed since my last post on crowdfunding. No, the SEC still has not acted. Things have changed in other ways.
The Republicans now control both houses of Congress, and the Republican-controlled Congress will undoubtedly be friendlier to small business and more concerned about the regulatory costs involved in raising capital. The new Congress is dominated by people like Congressman McHenry.
It might be better at this point to start over, instead of waiting for the SEC to finish its exercise in regulatory futility. And, this time, Congress shouldn’t wait for SEC action. It should put the final exemption in the statute itself, with SEC input. The SEC certainly can’t argue that they need more time to study the issue.
President Obama might threaten a veto and argue that we should wait to see if the existing provisions work. But keep in mind that the Obama administration endorsed the original House bill. Was that original endorsement mere political grandstanding, or does President Obama really want to provide an effective exemption?
Congress is unlikely to override a presidential veto, so if that happens, we’ll probably have to wait for a new President to get a workable crowdfunding exemption.
Friday, November 14, 2014
In a 2012 article on securities crowdfunding, I warned about the U.S. securities law issues raised by foreign crowdfunding sites selling securities to U.S. investors. I pointed out that “some of those foreign sites also sell to U.S. investors, and some of the investments they sell would almost certainly qualify as securities under U.S. law.”
A recent SEC consent order involving Eureeca Capital shows that the SEC is well aware of the issue and willing to go after foreign sites that sell to U.S. investors.
According to the consent order, Eureeca, based in the Cayman Islands, operates a global crowdfunding platform that connects non-U.S. issuers with investors interested in buying equity securities. Eureeca had a disclaimer on its website that the securities were not being offered to U.S. residents, but it nevertheless allowed U.S. residents to invest in some of the offerings. Eureeca apparently knew these investors were Americans; they provided copies of their passports and proof of U.S. addresses before investing.
The consent order finds that these unregistered sales of securities violated section 5 of the Securities Act and also that Eureeca was acting as an unregistered broker, in violation of section 15 of the Exchange Act. Eureeca is required to pay a $25,000 fine (a fairly significant fine considering that the total amount sold to the U.S. investors, according to the order, was only $20,000).
Given the plethora of international crowdfunding platforms, I wouldn’t be surprised to see more actions like this in the future.
Thursday, November 6, 2014
I have previously blogged about Institutional Shareholder Services’ policy survey and noted that a number of business groups, including the Chamber of Commerce, had significant concerns. In case you haven’t read Steve Bainbridge’s posts on the matter, he’s not a fan either.
Calling the ISS consultation period “a decision in search of a process,” the Chamber released its comment letter to ISS last week, and it cited Bainbridge's comment letter liberally. Some quotable quotes from the Chamber include:
Under ISS’ revised policy, according to the Consultation, “any single factor that may have previously resulted in a ‘For’ or ‘Against’ recommendation may be mitigated by other positive or negative aspects, respectively.” Of course, there is no delineation of what these “other positive or negative aspects” may be, how they would be weighted, or how they would be applied. This leaves public companies as well as ISS’ clients at sea as to what prompted a determination that previously would have seen ISS oppose more of these proposals. This is a change that would, if enacted, fly in the face of explicit SEC Staff Guidance on the obligations to verify the accuracy and current nature of information utilized in formulating voting recommendations.
The proposed new policy—as yet undefined and undisclosed—is also lacking in any foundation of empirical support… Indeed, a number of studies confirm that there is no empirical support for or against the proposition ISS seems eager to adopt.
[Regarding equity plan scorecards] there is no clear indication on the part of ISS as to what weight it will assign to each category of assessment—cost of plan, plan features, and company grant practices… this approach benefits ISS (and in particular its’ consulting operations), but does nothing to advance either corporate or shareholder interests or benefits. The Consultation also makes clear that, for all ISS’ purported interest in creating a more “nuanced” approach, in fact the proposed policy fosters a one-size-fits-all system that fails to take into account the different unique needs of companies and their investors.
Proxy votes cast in reliance on proxy voting policies based upon this Consultation cannot—by definition—be reasonably designed to further shareholder values.
ISS had a number of other recommendations but they didn’t raise the ire of Bainbridge and the Chamber. For the record, Steve is angry about the independent chair shareholder proposals, but please read his well-documented posts and judge for yourself whether ISS missed the mark. The ISS’ 2015 US Proxy Voting Guidelines were released today. Personally, I plan to raise some of the Guidelines discussing fee-shifting bylaws and exclusive venue provisions in both my Civil Procedure and Business Associations classes.
Let’s see how the Guidelines affect the next proxy season—the recommendations from the two-week comment period go into effect in February.
November 6, 2014 in Business Associations, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Marcia Narine, Securities Regulation, Teaching | Permalink | Comments (0)
Friday, October 31, 2014
Daniel Fisher at Forbes has posted an interesting story about Columbia Law Professor Robert Jackson's attempt to obtain information about investment advisors from the SEC. The SEC first denied they had the information, then said it would be too burdensome to produce the information. The kicker: an SEC economist has published a study using that very data. Fisher provides copies of Professor Jackson's persistent FOIA requests and the SEC's responses.
It's a fascinating study in bureaucratic favoritism and stubbornness. Not particularly surprising, but fascinating.
Thursday, October 30, 2014
This paper investigates the voting patterns of shareholders on the recently enacted “Say-On-Pay” (SOP) for publicly traded corporations, and the efficacy of vote outcomes on rationalizing executive compensation. We find that small shareholders are more likely than large shareholders to use the non-binding SOP vote to govern their companies: small shareholders are more likely to vote for a more frequent annual SOP vote, and more likely to vote “against” SOP (i.e., to disapprove executive compensation). Further, we find that low support for management in the SOP vote is more likely to be followed by a decrease in excess compensation, and by a more reasonable selection of peer companies for determining compensation, when ownership is more concentrated. Hence, the non-binding SOP vote offers a convenient mechanism for small shareholders to voice their opinions, yet, larger shareholders must be present to compel the Board to take action. Thus, diffuse shareholders are able to coordinate on the SOP vote to employ the threat that large shareholders represent to management.
Monday, October 27, 2014
On Friday, I participated in the 2014 Workshop for Corporate & Securities Litigation sponsored by the University of Richmond School of Law and the University of Illinois College of Law and held on the University of Richmond's campus. Thanks to Jessica Erickson and Verity Winship for hosting an amazing group of scholars presenting impressive, interesting papers. I attended the workshop to test an idea for a paper tentatively entitled: "Policy and International Securities Fraud Actions: A Matter of Investor and (or) Market Protection?"
The paper would address an important issue in U.S. federal securities law: the extraterritorial reach of the general anti-fraud protections in Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 adopted by the U.S. Securities and Exchange Commission under Section 10(b). In a world where securities transactions often cross borders—sometimes in non-transparent ways—securities regulators, issuers, investors, and intermediaries, as well as legal counsel and the judiciary, all need clarity on this matter in order to plan and engage in transactions, advocacy, and dispute resolution. Until four years ago, the rules in this area (fashioned more as a matter of jurisdiction than extraterritorial reach) were clear, but their use often generated unpredictable results.
In Morrison v. Nat’l Austl. Bank Ltd., 130 S. Ct. 2869 (2010), the U.S. Supreme Court held that “Section 10(b) reaches the use of a manipulative or deceptive device or contrivance only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States.” This was a non-obvious analytical result (at least to me) that has generated significant criticism, debate, and discussion. The Court's struggle—and that of those who disagree with the holding or the Court's reasoning or both—has been to determine the purpose(s) of Section 10(b) as a federal securities law liability statute and assess the extraterritorial reach of Section 10(b) in light of that purpose or those purposes. This project extends my earlier work (originally written for and published as part of a French colloquium in 2012) and involves the engagement of a deep analysis of long-standing, albeit imperfectly articulated, federal securities regulation policy in the context of cross-border fraud and misstatement liability.
This will be a big undertaking, if I commit to a comprehensive approach. I got a lot of good feedback on my overall concept for the project--enough that I am rethinking the project in significant ways. One possible idea is to approach the underlying general policy articulation first, as a separate project, before undertaking the formidable task of rationalizing that policy at the intersection of the academic literature on class action litigation, Section 10(b) and Rule 10b-5, and cross-border markets and cross-listings. The two-stage approach has significant appeal to me. I start from the notion that investor protection and the maintenance of market integrity under federal securities regulation both serve the foundational goal of promoting capital formation. But that is contestable . . . .
What are your thoughts regarding the most coherent articulation of the policies underlying Section 10(b) and Rule 10b-5 multinational securities regulation and the appropriateness of the Morrison test for extraterritoriality in light of that articulation?
Friday, October 24, 2014
I used to joke that my alma mater Columbia University’s core curriculum, which required students to study the history of art, music, literature, and philosophy (among other things) was designed solely to make sure that graduates could distinguish a Manet from a Monet and not embarrass the university at cocktail parties for wealthy donors. I have since tortured my son by dragging him through museums and ruins all over the world pointing spouting what I remember about chiaroscuro and Doric columns. He’s now a freshman at San Francisco Art Institute, and I’m sure that my now-fond memories of class helped to spark a love of art in him. I must confess though that as a college freshman I was less fond of Contemporary Civilization class, (“CC”) which took us through Plato, Aristotle, Herodotus, Hume, Hegel, and all of the usual suspects. At the time I thought it was boring and too high level for a student who planned to work in the gritty city counseling abused children and rape survivors.
Fast forward twenty years or so, and my job as a Compliance and Ethics Officer for a Fortune 500 company immersed me in many of the principles we discussed in CC, although we never spoke in the lofty terms that our teaching assistant used when we looked at bribery, money- laundering, conflicts of interest, terrorism threats, data protection, SEC regulations, discrimination, and other issues that keep ethics officers awake at night. We did speak of values versus rules based ethics and how to motivate people to "do the right thing."
Now that I am in academia I have chosen to research on the issues I dealt with in private life. Although I am brand new to the field of normative business ethics, I was pleased to have my paper accepted for a November workshop at Wharton's Zicklin Center for Business Ethics Research. Each session has two presenters who listen to and respond to feedback from attendees, who have read their papers in advance. Dr. Wayne Buck, who teaches business ethics at Eastern Connecticut State University, presented two weeks ago. He entitled his paper “Naming Names,” and using a case study on the BP Oil spill argued that the role of business ethics is not merely to promulgate norms around conduct, but also to judge individual businesspeople on moral grounds. Professor John Hasnas of Georgetown’s McDonough School of Business also presented his working paper “Why Don't Corporations Have the Right to Vote?” He argued that if we accept a theory of corporate moral agency, then that commits us to extending them the right to vote. (For the record, my understanding of his paper is that he doesn’t believe corporations should have the right.) Attendees from Johns Hopkins, the University of Connecticut, Pace and of course Wharton brought me right back to my days at Columbia with references to Rawls and Kant. My comments were probably less theoretical and more related to practical application, but that’s still my bent as a junior scholar.
In a few weeks, I present on my theory of the social contract as it relates to business and human rights. In brief, I argue that multinational corporations enter into social contracts with the states in which they operate (in large part to avoid regulation) and with stakeholders around them (the "social license to operate", as Professor John Ruggie describes it). Typically these contracts consist of the corporate social responsibility reports, voluntary codes of conduct, industry initiatives, and other public statements that dictate how they choose to act in society, such as the UN Global Compact. Many nations have voluntary and mandatory disclosure regimes, which have the side benefit of providing consumers and investors with the kinds of information that will help them determine whether the firm has “breached” the social contract by not living up to its promise. The majority of these proposals and disclosure regimes (such as Dodd-Frank conflict minerals) rest on the premise that armed with certain information, consumers and investors (other than socially responsible investors) will pressure corporations to change their behavior by either rewarding “ethical” behavior or by punishing firms who act unethically via a boycott or divestment.
I contend in my article that: (1) corporations generally respond to incentives and penalties, which can cause them to act “morally;” (2) states refuse to enter into a binding UN treaty on business and human rights and often do not uniformly enforce the laws, much less the social contracts; (3) consumers over-report their desire to buy goods and services from “ethical” companies; and (4) disclosure for the sake of transparency, without more, will not lead to meaningful change in the human rights arena. Instead, I prefer to focus on the kinds of questions that the board members, consumers, and investors who purport to care about these things should ask. I try to move past the fuzzy concept of corporate social responsibility to a stronger corporate accountability framework, at least where firms have the ability to directly or indirectly impact human rights.
As a compliance officer, I did not use terms like “deontological” and “teleological” principles, but some heavy hitters such as Norway's Government Pension Fund, with over five billion Kronos under management, do. The 2003 report that helped establish the Fund’s recommendations on ethical guidelines state in part:
One group of ethical theories asserts that we should primarily be concerned with the consequences of the choices we make. These theories are in other words forward-looking, focusing on the consequences of an action. The choice that is ethically correct influences the world in the best possible way, i.e. has the most favourable consequences. Every choice generates an infinite number of consequences and the decisive question is of course which of the consequences we should focus on. Again, a number of answers are possible. Some would assert that we should focus on individual welfare, and that the action that has the most favourable consequences for individual welfare is the best one. Others would claim that access to resources or the opportunities or rights of the individual are most important. However, common to all these answers is the view that the desire to influence the world in a favourable direction should govern our choices.
Another group of ethical theories focuses on avoiding breaching obligations by avoiding doing evil and fulfilling obligations by doing good. Whether the results are good or evil, and whether the cost of doing good is high, are in principle of no significance. This is often known as deontological ethics.
In relation to the Petroleum Fund, these two approaches will primarily influence choice in that deontological ethics will dictate that certain investments must be avoided under any circumstances, while teleological ethics will lead to the avoidance of investments that have less favourable consequences and the promotion of investments that have more favourable consequences.
Recently, NGOs have pressured firms to speak on out human rights abuses at mega-events and have published their responses. The US government has made a number of efforts, some unsuccessful, to push companies toward more proactive human rights initiatives. These issues are here to stay. As I formulate my recommendations, I am looking at the pension fund, some work by ethicists researching marketing principles, writings by political and business philosophers, and of course, my old friends Locke, Rousseau, Rawls and Kant for inspiration. If you have ideas of articles or authors I should consult, feel free to comment below or to email me at email@example.com. And if you will be in Philadelphia on November 14th, register for the session at Wharton and give me your feedback in person.
October 24, 2014 in Books, Business School, Call for Papers, Conferences, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Marcia Narine, Securities Regulation | Permalink | Comments (0)
Wednesday, October 15, 2014
Whether you are teaching insider trading as part of a corporations or a securities regulation course, you practice in the area, or you like these cases because they contain some of the most interesting fact patterns..... I have a couple of gems for you.
First, the on line edition of the New Yorker features two great stories on insider trading. The first story, The Empire of Edge written by Patrick Radden Keefe, focuses on the conviction of a trader at S.A.C. capital for trades made 10 days before the release of results from clinical trials on an alzheimer's medication. The hedge fund reversed its $.785B position in two companies testing the drug and took a short position against the companies earning the fund $275M. In classic long-form journalism at its best, the story is riveting as it unfolds. The second story, A Dirty Business by George Packer, tells the story of Raj Rajaratnam, head of the Galleon hedge fund at the heart of the 2009 informant ring scandal, the prosecution and the SEC's stance on enforcement.
For those of you who are interested, the SEC posted a running list of insider trading enforcement actions here.
Tuesday, October 14, 2014
To be clear, I'm not an economist. I do, however, have an interest in economics, economic theory, and especially behavioral economics. I incorporate basic concepts of economics into my courses, especially Business Organizations and Energy Law. This week's announcement of Jean Tirole as the 2014 Nobel Laureate in economics thus caught my eye.
I admit I did not much about Tirole before the announcement, and after just a little reading, it's clear to me that I need to know more. A nice summary of Tirole's work (written by Tyler Cowen) can be found here. Cowen introduces the announcement and Tirole this way:
A theory prize! A rigor prize! I would say it is about principal-agent theory and the increasing mathematization of formal propositions as a way of understanding economics. He has been a leading figure in formalizing propositions in many distinct areas of microeconomics, most of all industrial organization but also finance and financial regulation and behavioral economics and even some public choice too. He is a broader economist than many of his fans realize.
Tirole is a Frenchman, he teaches at Toulouse, and his key papers start in the 1980s. In industrial organization, you can think of him as extending the earlier work of Ronald Coase and Oliver Williamson with regard to opportunism and recontracting, but applying more sophisticated and more mathematical forms of game theory. Tirole also has been a central figure in procurement theory and optimal contracts when there is asymmetric information about costs. The idea of mechanism design runs throughout his papers in many different guises. Many of his papers show “it’s complicated,” rather than presenting easily summarizable, intuitive solutions which make for good blog posts. That is one reason why his ideas do not show up so often in blogs and the popular press, but they nonetheless have been extremely influential in the economics profession. He has shown a remarkable breadth and depth over the course of the last thirty or so years.
Cowen then summarizes (or at least introduces) much of Tirole's work. I am now working my through a paper Tirole wrote with Jean-Jacques Laffont that discusses when regulatory capture is likely to happen. (Cowen notes, " I have yet to see the insights of this paper incorporated into the rest of the literature adequately.")
The papers is called The Politics of Government Decision-Making: A Theory of Regulatory Capture. Two of my favorite lines:
- "The assumption that Congress is a benevolent maximizer of a social welfare function is clearly an oversimplification, as its members are themselves subject to interest-group influence."
- "In contrast with the conventional wisdom on interest-group politics, an interest group may be hurt by its own power."
Here's the abstract (paper available on JSTOR):
The paper develops an agency-theoretic approach to interest-group politics and shows the following: (1) the organizational response to the possibility of regulatory agency politics is to reduce the stakes interest groups have in regulation. (2) The threat of producer protection leads to low-powered incentive schemes for regulated firms. (3) Consumer politics may induce uniform pricing by a multiproduct firm. (4) An interest group has more power when its interest lies in inefficient rather than efficient regulation, where inefficiency is measured by the degree of informational asymmetry between the regulated industry and the political principal (Congress).
It's worth a read, even if the math part is a little beyond some of us.
H/T: Geoffrey Manne
Thursday, October 9, 2014
The numbers are in on SEC Dodd-Frank conflict minerals filings. According to a Tulane study, the average company spent over half a million dollars to comply. A review by law firm Schulte Roth & Zabel shows how meaningless (in my view), some of those filings were. Meanwhile, Canada failed to pass another conflict minerals bill and NGOs are pressuring the EU to step up to the plate for more rigorous regulation. I continue to believe that there has to be a better way to resolve a deadly human rights crisis, and that disclosure and due diligence in the supply chain are important but are not the solutions.
Wednesday, October 8, 2014
Alibaba dominated the September business press coverage with its record-breaking IPO last month, and news of its stock price, trading at a 30% premium, continues to dominate coverage. I have been using the headline-hogging IPO in my corporations class to discuss raising capital, which I am sure many of you are doing as well. Here are a few creative uses for the class-friendly headlines:
- I used coverage of the IPO and its short-lived halo effect on other tech IPO's as a companion to the E-bay stock spinning case (taught under director fiduciary duties).
As we move into securities next week,
- Students will examine Alibaba's registration statement as we look at section 11 liability.
- Students will review portions of a 2012 10b(5) lawsuit against Yahoo alleging that Yahoo! made materially false and misleading statements regarding its holdings in Alibaba.
Please add to the list of uses in the comments section if you have any new ideas or suggestions.
Thursday, October 2, 2014
For the second time, I have assigned my BA students to write their own shareholder proposals so that they can better understand the mechanics and the substance behind Rule 14-a8. As samples, I provided a link to over 500 proposals for the 2014 proxy season. We also went through the Apple Proxy Statement as a way to review corporate governance, the roles of the committees, and some other concepts we had discussed. As I reviewed the proposals this morning, I noticed that the student proposals varied widely with most relating to human rights, genetically modified food, environmental protection, online privacy, and other social factors. A few related to cumulative voting, split of the chair and CEO, poison pills, political spending, pay ratio, equity plans, and other executive compensation factors.
After they take their midterm next week, I will show them how well these proposals tend to do in the real world. Environmental, social, and governance factors (political spending and lobbying are included) constituted almost 42% of proposals, up from 36% in 2013, according to Equilar. Of note, 45% of proposals calling for a declassified board passed, with an average of 89% support, while only two proposals for the separation of chair and CEO passed. Astonishingly, Proxy Monitor, which looked at the 250 largest publicly-traded American companies, reports that just three people and their family members filed one third of all proposals. Only 4% of shareholder proposals were supported by a majority of voting shareholders. Only one of the 136 proposals related to social policy concerns in the Proxy Monitor data set passed, and that was an animal welfare proposal that the company actually supported.
I plan to use two of the student proposals verbatim on the final exam to test their ability to assess whether a company would be successful in an SEC No-Action letter process. Many of the students thought the exercise was helpful, although one of the students who was most meticulous with the assignment is now even more adamant that she does not want to do transactional law. Too bad, because she would make a great corporate lawyer. I have 7 weeks to convince her to change her mind.
October 2, 2014 in Business Associations, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Law School, Marcia Narine, Securities Regulation, Teaching | Permalink | Comments (0)
Thursday, September 25, 2014
Professor Dionysia Katelouzou of Kings College, London has written an interesting empirical article on hedge fund activisim. The abstract is below:
In recent years, activist hedge funds have spread from the United States to other countries in Europe and Asia, but not as a duplicate of the American practice. Rather, there is a considerable diversity in the incidence and the nature of activist hedge fund campaigns around the world. What remains unclear, however, is what dictates how commonplace and multifaceted hedge fund activism will be in a particular country.
The Article addresses this issue by pioneering a new approach to understanding the underpinnings and the role of hedge fund activism, in which an activist hedge fund first selects a target company that presents high-value opportunities for engagement (entry stage), accumulates a nontrivial stake (trading stage), then determines and employs its activist strategy (disciplining stage), and finally exits (exit stage). The Article then identifies legal parameters for each activist stage and empirically examines why the incidence, objectives and strategies of activist hedge fund campaigns differ across countries. The analysis is based on 432 activist hedge fund campaigns during the period of 2000-2010 across 25 countries.
The findings suggest that the extent to which legal parameters matter depends on the stage that hedge fund activism has reached. Mandatory disclosure and rights bestowed on shareholders by corporate law are found to dictate how commonplace hedge fund activism will be in a particular country (entry stage). Moreover, the examination of the activist ownership stakes reveals that ownership disclosure rules have important ramifications for the trading stage of an activist campaign. At the disciplining stage, however, there is little support that the activist objectives and the employed strategies are a reflection of the shareholder protection regime of the country in which the target company is located.
September 25, 2014 in Business Associations, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, M&A, Marcia Narine, Securities Regulation | Permalink | Comments (0)
Thursday, September 18, 2014
Teaching the definition of a "security" to business associations students who: 1) want to be litigators; 2) are afraid of math, finance, and accounting; 3) don't know anything about business; 4) only take the class because it's required; and 5) aren't allowed to distract themselves with electronics in class is no small feat.
Thankfully, as we were discussing the definition and exemptions, we also touched on IPOs. Many of the students knew nothing about IPOs but were already Alibaba customers and going through some of the registration statement made them understand the many reasons companies want to avoid going public. Of course, now that we went through some of the risk factors, my students who seemed gung ho about the IPO after watching some videos about the hype were a little less excited about it (good thing because they probably couldn't buy anyway).
Now if I can only figure out how to jazz up the corporate finance chapter next week.
September 18, 2014 in Business Associations, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Law School, Marcia Narine, Securities Regulation, Teaching | Permalink | Comments (2)
Wednesday, September 17, 2014
Practitioners and academics alike should be interested in yesterday's announcement by that the SEC that it is bringing an insider trading enforcement action against a law firm IT employee for allegedly trading based on the firm's merger work for clients. The employee allegedly made over $300,000 in a several year scheme of trading based upon client information. The U.S. Attorney's Office filed related criminal charges against the employee.
Donna Nagy at Indiana University Maurer School of Law, in her article, Insider Trading and the Gradual Demise of Fiduciary Principles, explains the theory of liability which extends the insider trading scope to law firm employees:
Under the alternative “misappropriation” theory endorsed by the Court in United States v. O’Hagan, persons “outside” the issuing corporation can likewise violate Section 10(b) and Rule 10b-5. Such a violation occurs when a fiduciary personally profits from a securities transaction through undisclosed use of a principal’s material nonpublic information. Thus, as the Court explained, whereas the classical theory “premis[es] liability on a fiduciary relationship between company insider and purchaser or seller of the company’s stock, the misappropriation theory premises liability on a fiduciary-turned-trader’s deception of those who entrusted him with access to confidential information.”
The SEC, in its release cautioned that "Insider trading by employees of law firms and other professional organizations is an important enforcement focus for us."
Thursday, September 11, 2014
As I predicted in 2011 here and here, in 2012 here, in 2013 in amicus brief, and countless times on this blog, the SEC Dodd-Frank conflicts minerals law has had significant unintended consequences on the Congolese people and has been difficult to comply with. Apparently the Commerce Department, which has a role to play in determining which mines are controlled by rebels so that US issuers can stay away from them, can't actually figure it out either. In the past few days, the Washington Post, the Guardian, and other experts including seventy individuals and NGOS (some Congolese) who signed a memo, have called this misguided law into question. In my view, without the "name and shame" aspect of the law, it is basically an extremely expensive, onerous due diligence requirement that only a few large companies can or have the incentive to do well or thoroughly. More important, and I as I expected, it has had little impact on the violence on the ground and has hurt the people it purported to help.
I had hoped to be wrong. The foundation that I work with helps medical practitioners, midwives, and traditional birth attendants in eastern Congo and many of their patients and neighbors are members of the artisanal mining community. I won’t go as far as Steve Bainbridge has in calling for the law’s repeal because I think that companies should do better due diligence of their supply chains, especially in conflict zones. This law, however, is not the right one for Congo and the SEC is not the right agency to address this human rights crisis. Frankly, I don’t know that the EU's voluntary certification is the right answer either. I hope that Canada, which is looking at a similar rule, pays close heed and doesn’t perpetuate the same mistake that the US Congress made and that the SEC exacerbated. In the meantime, I will stay tuned to see how and if the courts, Congress, and the SEC revisit the rule.
Thursday, September 4, 2014
Behemoth proxy advisory firm Institutional Shareholder Services has released its 2015 Policy Survey. I have listed some of the questions below:
Which of the following statements best reflects your organization's view about the relationship between goalsetting and award values?
Is there a threshold at which you consider that the magnitude of a CEO’scompensation should warrant concern even if the company’s absolute and relative performance have been positive, for example, outperforming the peer group?
With respect to evaluating the say on pay advisory vote, how does your organization view disclosed positive changes to the pay program that will be implemented in the succeeding year(s) when a company demonstrates pay for performance misalignment or other concerns based on the year in review?
If you chose either the first or second answer in the question above, should shareholders expect disclosure of specific details of such future positive changes (e.g., metrics, performance goals, award values, effective dates) in order for the changes to be considered as a potential mitigator for pay for performance or other concerns for the year in review?
Where a board adopts without shareholder approval a material bylaw amendment that diminishes shareholders' rights, what approach should be used when evaluating board accountability?
Should directors be held accountable if shareholder unfriendly provisions were adopted prior to the company’s IPO?
In general, how does your organization consider gender diversity when evaluating boards?
As a general matter, what weight (relative out of 100%) would you view as appropriate for each of the categories indicated below (notwithstanding that some factors, such as repricing without shareholder approval, may be 100% unacceptable)?
How significant are the following factors when evaluating the board's role in risk oversight in your voting decision on directors (very significant, somewhat significant, not significant)?
In making informed voting decisions on the ratification of the outside auditor and the reelection of members of audit committees, how important (very important/somewhat important/not important) would the following disclosures be to you?
In your view, when is it appropriate for a company to utilize quantitative E&S (environmental and social) performance goals?
As someone who studies and consults on corporate governance issues, I look forward to seeing the results of this survey. However, the US Chamber of Commerce’s Center for Capital Market Competitiveness, which has argued that ISS and other proxy advisory firms have conflicts of interest and lack transparency, has issued a response to ISS because:
The CCMC is concerned that the development of the Survey lacks a foundation based on empirical facts and creates a one-size-fits-all system that failure to take into account the different unique needs of companies and their investors. We believe that these flaws with the Survey can adversely affect advisory recommendations negatively impacting the decision making process for the clients of proxy advisory firms. The CCMC is also troubled that certain issues presented in the Survey, such as Pay for Performance, will be the subject of Securities and Exchange Commission (“SEC”) rulemakings in the near future. While we have provided commentary to those portions of the Survey, we believe that their inclusion in the survey is premature pending the completion of those rulemakings….It is both surprising and very troublesome that the Survey does not contain a single reference to the paramount concern of investors and portfolio managers—public company efforts to maintain and enhance shareholder value—and seeks to elicit only abstract philosophies and opinions, completely eschewing any pretense of an interest in obtaining hard facts and empirically-significant data. This confirmation—that ISS’ policies and recommendations are based solely on a miniscule sampling of philosophical preferences, rather than empirical data—is itself a matter that requires, but does not yet receive, appropriate disclosure and disclaimers on ISS research reports.
The CCMC’s letter details concerns with each of ISS’ questions. Both the complete survey and the CCMC response are worth a read.
Wednesday, August 27, 2014
Thanks for your informative post, Anne. I started drafting this post as a comment to yours, and then I realized it was its own post. [sigh]
It seems to me that the U.S. Department of HHS and any commentators must grapple with what has been a difficult, fact-based question in determining how to define “closely held” to effectuate the Supreme Court’s intent in as expressed in the Hobby Lobby opinion. That question? What "control" means in this context.
The Court said in the Hobby Lobby opinion: “The companies in the cases before us are closely held corporations, each owned and controlled by members of a single family, and no one has disputed the sincerity of their religious beliefs.” More specifically, the Court notes that the Hahns (owners of shares in Conestoga) “control its board of directors and hold all of its voting shares” and notes that Hobby Lobby and Mardel “remain closely held, and David, Barbara, and their children retain exclusive control of both companies.” [Emphasis has been added by me in each quote.]
The definition of “control” primarily has been a question of fact in business law, making the task of defining it here somewhat difficult. Some questions and considerations to grapple with are set forth below the fold. I am sure that others can come up with more. I am posting these as a way of getting the collective juices flowing.
Monday, August 25, 2014
This follows on Ann's post yesterday on Gender and Crowdfunding. Ann, so glad you've joined me and Steve Bradford as securities crowdfunding watchers! Delighted to have you in that informal, somewhat disgruntled "club."
I have been interested in whether securities crowdfunding will democratize business finance. (I note here that Steve Bradford's comment to Ann's post raises the broader question of crowdfunding's ability to better engage underrepresented populations in general.) My interest has, however, been more on the investor (backer) side of the crowdfunding equation than on the business (entrepreneur) side.
As Ann notes, given the delay in the Securities and Exchange Commission (SEC) rulemaking under Title III of the Jumpstart Our Business Startups (JOBS) Act, the information on gender and crowdfunding that we have so far comes from other types of crowdfunding. This information may or may not map well to markets in securities crowdfunding. But it's still worth reviewing the information that we do have.