Tuesday, July 1, 2014
Shai Levi, Benjamin Segal, and Dan Segal have posted Does Corporate Governance Make Financial Reports Better, or Just Better for Equity Investors? on SSRN with the following abstract:
Financial reports should provide useful information to both shareholders and creditors, according to U.S. accounting principles. However, directors of corporations have fiduciary duties only toward equity holders, and those fiduciary duties normally do not extend to the interests of creditors. We examine whether this slant in corporate governance biases financial reports in favor of equity investors, and in particular leads to a downward bias in reported debt that can hurt creditors. We focus on firms’ decision to issue structured debt securities that are classified as equity in financial reports and can circumvent debt covenants. We find that when the local legal regime requires directors to consider creditors’ interests, firms are less likely to use such structured transactions, particularly if the board of directors of the firm is independent. Our results suggest that when corporate governance is designed to protect only equity holders, firms’ financial reports serve equity holders’ interests at the expense of other stakeholders.
Marco Becht, Andrea Polo, and Stefano Rossi have posted Does Mandatory Shareholder Voting Prevent Bad Acquisitions? on SSRN with the following abstract:
Corporate acquisitions can be ruinous for acquirer shareholders. Can shareholder voting prevent such corporate disasters? Previous empirical studies based on U.S. data are inconclusive because shareholder approval is discretionary. We study the U.K. setting where bids for relatively large targets are subject to mandatory shareholder approval. Our findings suggest that under the U.K. listing rules shareholder voting can deter bad acquisitions. We find that shareholders gain 8 cents per dollar at the announcement of a Class 1 deal or $13.6 billion over 1992-2010 in aggregate. In the United States acquirers lost $214 billion in matched deals during the same period. In the U.K. relatively smaller Class 2 transactions do not require a vote and shareholders lost $3 billion. Our results are robust to confounding effects and other controls. A Multidimensional Regression Discontinuity Design (MRDD) inspired test supports a causal interpretation of our findings. Class 1 deals just above the assignment threshold perform better than Class 2 deals just below. Our evidence suggests that mandatory voting makes boards more likely to refrain from overpaying or from proposing deals that are not in the interest of shareholders.
Patrick Augustin, Menachem Brenner, and Marti G. Subrahmanyam have posted Informed Options Trading Prior to M&A Announcements: Insider Trading? on SSRN with the following abstract:
We investigate informed trading activity in equity options prior to the announcement of corporate mergers and acquisitions (M&A). For the target companies, we document pervasive directional options activity, consistent with strategies that would yield abnormal returns to investors with private information. This is demonstrated by positive abnormal trading volumes, excess implied volatility and higher bid-ask spreads, prior to M&A announcements. These effects are stronger for out-of-the-money (OTM) call options and subsamples of cash offers for large target firms, which typically have higher abnormal announcement returns. The probability of option volume on a random day exceeding that of our strongly unusual trading (SUT) sample is trivial - about three in a trillion. We further document a decrease in the slope of the term structure of implied volatility and an average rise in percentage bid-ask spreads, prior to the announcements. For the acquirer, we provide evidence that there is also unusual activity in volatility strategies. A study of all Securities and Exchange Commission (SEC) litigations involving options trading ahead of M&A announcements shows that the characteristics of insider trading closely resemble the patterns of pervasive and unusual option trading volume. Historically, the SEC has been more likely to investigate cases where the acquirer is headquartered outside the US, the target is relatively large, and the target has experienced substantial positive abnormal returns after the announcement.
Monday, June 30, 2014
On June 27, 2014 at the Latinos on Fast Track (LOFT) Investors Forum in Washington, D.C., Commissioner Luis A. Aguilar offered remarks on Evaluating Pension Fund Investments Through The Lens Of Good Corporate Governance.
On June 26, 2014, Stephen Luparello, Director of the SEC's Division of Trading and Markets offered testimony before the United States House of Representatives Subcommittee on Capital Markets and Government Sponsored Enterprises, Committee on Financial Services. The testimony mainly related to the Division's activities and responsibilities.
The SEC has announced new hires in its Office of Administrative Law Judges. The press release states:
The Securities and Exchange Commission today announced that two new judges and three new attorneys will join the Office of Administrative Law Judges this summer.
James E. Grimes joined the office as an Administrative Law Judge on June 30. The office also recently hired attorneys Darien S. Capron, William Weihao Miller, and Jessica Neiterman as law clerks. Another Administrative Law Judge is expected to join the office in August. These additions will nearly double the size of the office, which received more than 200 assignments to conduct public hearings and issued 34 Initial Decisions in fiscal 2013.
NASAA: Notice of Request for Comment Regarding a Proposed Model Rule for the Electronic Filing of Form D and Other Securities Registration or Notice Filing Documents
Sunday, June 29, 2014
David Cay Johnston written an interesting piece, US Electricity Markets Are Anti-Consumer, which asserts that lack of transparency in electricity markets may violate federal securities law. The piece asserts:
Accusations of market manipulation dog the electricity markets from coast to coast, raising questions about the integrity of these secretive entities and whether they can ensure sufficient generating capacity at all times.
Opportunities to drive electricity prices up through misconduct are rampant and sure to grow unless the current rules are reformed and veils of secrecy are pulled back.
The electricity markets, originally designed by Enron, are supposed to benefit consumers by attracting the necessary investment in power plants to meet the demand for juice at all times, especially during peak periods such as hot summer evenings.
Details available here. Chair Mary Jo White's statement is available here. Commissioner Luis A. Aguilar's statement is available here. Commissioner Daniel M. Gallagher's statement is available here. Commissioner Michael S. Piwowar's statement is available here. Commissioner Kara M. Stein's statement is available here.
The SEC Actions Blog has compiled This Week In Securities Litigation (Week ending June 27, 2014).
The following law review articles relating to securities regulation are now available in paper format:
John Patrick Clayton, Note, The Two Faces of Janus: The Jurisprudential Past and New Beginning of Rule 10b-5, 47 U. Mich. J.L. Reform 853 (2014).
Keegan S. Drake, Note, The Fall and Rise of the Exit Consent, 63 Duke L.J. 1589 (2014).
Ronald J. Gilson & Reinier Kraakman, Market Efficiency after the Financial Crisis: It's Still a Matter of Information Costs, 100 Va. L. Rev. 313 (2014).
Bernice Grant, Independent Yet Captured: Compensation Committee Independence after Dodd-Frank, 65 Hastings L.J. 761 (2014).
Jill Gross, The Improbable Birth and Conceivable Death of the Securities Arbitration Clinic, 15 Cardozo J. Conflict Resol. 597 (2014).
Joseph A. Grundfest, Damages and Reliance under Section 10 (b) of the Exchange Act, 69 Bus. Law. 307 (2014).
Soo Ji Jung, Case Comment, U.S. v. Rajaratnam--No "Gain" without Pain: Amending the Sentencing Guidelines for Insider Trading to Better Reflect the Rapidly Evolving Financial Industry, 40 New Eng. J. on Crim. & Civ. Confinement 295 (2014).]
George L. Miles, Note, Let Judges Judge: Advancing a Review Framework for Government Securities Settlements Where Defendants Neither Admit Nor Deny Allegations, 46 Conn. L. Rev. 1111 (2014).
Paul Radvany, The SEC Adds a New Weapon: How Does the New Admission Requirement Change the Landscape?, 15 Cardozo J. Conflict Resol. 665 (2014).
Teresa J. Verges, Opening the Floodgates of Small Customer Claims in FINRA Arbitration: FINRA v. Charles Schwab & Co., Inc., 15 Cardozo J. Conflict Resol. 623 (2014).
Tuesday, June 24, 2014
On June 20, 2014 at Economic Club of New York, Chair Mary Jo White offered remarks on Intermediation in the Modern Securities Markets: Putting Technology and Competition to Work for Investors.
The following law review articles relating to securities regulation are now available in paper format:
Upton Au, Note, Toward a Reconceived Legislative Intent Behind the Foreign Corrupt Practices Act: The Public-Safety Rationale for Prohibiting Bribery Abroad, 79 Brook. L. Rev. 925 (2014).
Mukesh Bajaj, Sumon C. Mazumdar & Daniel A. McLaughlin, Assessing Market Efficiency for Reliance on the Fraud-on-the-Market Doctrine After Wal-Mart and Amgen, 26 Research in L. & Econ. 161 (2014).
Lauren A. Demanovich, Recent development, Holding Out for a Change: Why North Carolina Should Permit Holder Claims, 92 N.C. L. Rev. 988 (2014).
Eric Fortineaux, Student Article, The fight Against the Extractive Industries Transparency Initiative, 11 Loy. U. Chi. Int'l L. Rev. 65 (2013).
Jonathan D. Glater, Hurdles of Different Heights for Securities Fraud Litigants of Different Types, 2014 Colum. Bus. L. Rev. 47.
Ethan E. Litwin & Morgan J. Feder, European Collective Redress: Lessons Learned from the U.S. Experience, 26 Research in L. & Econ. 209 (2014).
Brett Neve, Note, NML Capital, Ltd. v. Republic of Argentina: An Alternative to the Inadequate Remedies Under the Foreign Sovereign Immunities Act, 39 N.C. J. Int'l L. & Com. Reg. 631 (2014).
Steven Thel, Taking Section 10(b) Seriously: Criminal Enforcement of SEC Rules, 2014 Colum. Bus. L. Rev. 1.
Welds, Leanne M. Note. Giving local municipalities the power to affect the national securities market: why the use of eminent domain to take mortgages should be subject to greater regulation. 79 Brook. L. Rev. 861 (2014).
Symposium: Hedge Funds in Bankruptcy, Articles by Keith Sharfman, G. Ray Warner, Hon. James M. Peck, Edward I. Altman, Alistaire Bambach, Anthony J. Casey, Eric B. Fisher, Katie L. Weinstein, Michelle M. Harner, Jamie Marincic Griffin, Jennifer Ivey-Crickenberger, Wulf A. Kaal and Daniel B. Kamensky, 22 Am. Bankr. Inst. L. Rev. 61-246 (2014).
Monday, June 23, 2014
The Court gets it right in Halliburton. Although the private right of action and the fraud-on-the-market theory should not have been imagined into existence, Congress has repeatedly acquiesced to both in subsequent legislation. The acquiescence is largely the product of Congress's failure to codify the private right of action, which is a necessary component of policing securities markets in the United States, although its scope likely needs to be narrowed. I like to hope that Congress will take this opportunity to codify the private right of action. But imagining that Congress will act seems more fanciful than believing that the 1934 Congress intended a private right of action under section 10(b) with a fraud-on-the-market theory of reliance.