Securities Law Commons^™

Who Bleeds When The Wolves Bite? A Flesh-And-Blood Perspective On Hedge Fund Activism And Our Strange Corporate Governance System, Leo E. Strine Jr.

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This paper examines the effects of hedge fund activism and so-called wolf pack activity on the ordinary human beings—the human investors—who fund our capital markets but who, as indirect of owners of corporate equity, have only limited direct power to ensure that the capital they contribute is deployed to serve their welfare and in turn the broader social good.

Most human investors in fact depend much more on their labor than on their equity for their wealth and therefore care deeply about whether our corporate governance system creates incentives for corporations to create and sustain jobs for them. And because …

Standing Voting Instructions: Empowering The Excluded Retail Investor, Jill E. Fisch

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Despite the increasing importance of shareholder voting, regulators have paid little attention to the rights of retail investors who own approximately 30% of publicly traded companies but who vote less than 30% of their shares. A substantial factor contributing to this low turnout is the antiquated mechanism by which retail investors vote. The federal proxy voting rules place primary responsibility for facilitating retail voting in the hands of custodial brokers who have limited incentives to develop workable procedures, and current regulatory restrictions impede market-based innovation that incorporate technological innovations.

One of the most promising such innovations is standing voting instructions …

Family Ties: Salman And The Scope Of Insider Trading, Jill E. Fisch

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On October 5, 2016, the Supreme Court heard oral argument in Salman v. United States. Salman raises questions about the scope of insider trading liability for tippees under the personal benefit test previously articulated in Dirks v. SEC. Some critics have argued the Second Circuit’s decision last year in United States v. Newman demonstrates that the personal benefit test is unduly restrictive and should be reconsidered. Salman offers an opportunity for the Supreme Court to do so.

This essay argues that Salman does not require the Court to reexamine the parameters of insider trading liability. Instead, the Court can …

Institutional Investors In Corporate Governance, Edward B. Rock

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This chapter of the Oxford Handbook on Corporate Law and Governance examines the role of institutional investors in corporate governance and the role of regulation in encouraging institutional investors to become active stewards. I approach these topics through asking what lessons we can draw from the U.S. experience for the E.U.’s 2014 proposed amendments to the Shareholder Rights Directive.

I begin by defining the institutional investor category, and summarizing the growth of institutional investors’ equity holdings over time. I then briefly survey how institutional investors themselves are governed and how they organize share voting. This leads me to two central …

The Mess At Morgan: Risk, Incentives And Shareholder Empowerment, Jill E. Fisch

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The financial crisis of 2008 focused increasing attention on corporate America and, in particular, the risk-taking behavior of large financial institutions. A growing appreciation of the “public” nature of the corporation resulted in a substantial number of high profile enforcement actions. In addition, demands for greater accountability led policymakers to attempt to harness the corporation’s internal decision-making structure, in the name of improved corporate governance, to further the interest of non-shareholder stakeholders. Dodd-Frank’s advisory vote on executive compensation is an example.

This essay argues that the effort to employ shareholders as agents of public values and, thereby, to inculcate corporate …

Federal Securities Fraud Litigation As A Lawmaking Partnership, Jill E. Fisch

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In its most recent Halliburton II decision, the Supreme Court rejected an effort to overrule its prior decision in Basic Inc. v. Levinson. The Court reasoned that adherence to Basic was warranted by principles of stare decisis that operate with “special force” in the context of statutory interpretation. This Article offers an alternative justification for adhering to Basic—the collaboration between the Court and Congress that has led to the development of the private class action for federal securities fraud. The Article characterizes this collaboration as a lawmaking partnership and argues that such a partnership offers distinctive lawmaking advantages. …

Confronting The Peppercorn Settlement In Merger Litigation: An Empirical Analysis And A Proposal For Reform, Jill E. Fisch, Sean J. Griffith, Steven M. Davidoff

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Shareholder litigation challenging corporate mergers is ubiquitous, with the likelihood of a shareholder suit exceeding 90%. The value of this litigation, however, is questionable. The vast majority of merger cases settle for nothing more than supplemental disclosures in the merger proxy statement. The attorneys that bring these lawsuits are compensated for their efforts with a court-awarded fee. This leads critics to charge that merger litigation benefits only the lawyers who bring the claims, not the shareholders they represent. In response, defenders of merger litigation argue that the lawsuits serve a useful oversight function and that the improved disclosures that result …

Introduction To Institutional Investor Activism: Hedge Funds And Private Equity, Economics And Regulation, William W. Bratton, Joseph A. Mccahery

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The increase in institutional ownership of recent decades has been accompanied by an enhanced role played by institutions in monitoring companies’ corporate governance behaviour. Activist hedge funds and private equity firms have achieved a degree of success in actively shaping the business plans of target firms. They may be characterized as pursuing a common goal – in the words used in the OECD Steering Group on Corporate Governance, both seek ‘to increase the market value of their pooled capital through active engagement with individual public companies. This engagement may include demands for changes in management, the composition of the board, …

Behaviorism In Finance And Securities Law, David A. Skeel Jr.

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In this Essay, I take stock (as something of an outsider) of the behavioral economics movement, focusing in particular on its interaction with traditional cost-benefit analysis and its implications for agency structure. The usual strategy for such a project—a strategy that has been used by others with behavioral economics—is to marshal the existing evidence and critically assess its significance. My approach in this Essay is somewhat different. Although I describe behavioral economics and summarize the strongest criticisms of its use, the heart of the Essay is inductive, and focuses on a particular context: financial and securities regulation, as recently revamped …

Why Do Retail Investors Make Costly Mistakes? An Experiment On Mutual Fund Choice, Jill E. Fisch, Tess Wilkinson-Ryan

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There is mounting evidence that retail investors make predictable, costly investment mistakes, including underinvestment, naïve diversification, and payment of excessive fund fees. Over the past thirty-five years, however, participant-directed 401(k) plans have largely replaced professionally managed pension plans, requiring unsophisticated retail investors to navigate the financial markets themselves. Policy-makers have struggled with regulatory interventions designed to improve the quality of investment decisions without a clear understanding of the reasons for investor mistakes. Absent such an understanding, it is difficult to design effective regulatory responses.

This article offers a first step in understanding the investor decision-making process. We use an internet-based …

Who Calls The Shots?: How Mutual Funds Vote On Director Elections, Stephen J. Choi, Jill E. Fisch, Marcel Kahan

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Shareholder voting has become an increasingly important focus of corporate governance, and mutual funds control a substantial percentage of shareholder voting power. The manner in which mutual funds exercise that power, however, is poorly understood. In particular, because neither mutual funds nor their advisors are beneficial owners of their portfolio holdings, there is concern that mutual fund voting may be uninformed or tainted by conflicts of interest. These concerns, if true, hamper the potential effectiveness of regulatory reforms such as proxy access and say on pay. This article analyzes mutual fund voting decisions in uncontested director elections. We find that …

The Trouble With Basic: Price Distortion After Halliburton, Jill E. Fisch

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Many commentators credit the Supreme Court’s decision in Basic, Inc. v. Levinson, which allowed courts to presume reliance rather than requiring individualized proof, with spawning a vast industry of private securities fraud litigation. Today, the validity of Basic’s holding has come under attack as scholars have raised questions about the extent to which the capital markets are efficient. In truth, both these views are overstated. Basic’s adoption of the Fraud on the Market presumption reflected a retreat from prevailing lower court recognition that the application of a reliance requirement was inappropriate in the context of impersonal public …

The Long Road Back: Business Roundtable And The Future Of Sec Rulemaking, Jill E. Fisch

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The Securities and Exchange Commission has suffered a number of recent setbacks in areas ranging from enforcement policy to rulemaking. The DC Circuit’s 2011 Business Roundtable decision is one of the most serious, particularly in light of the heavy rulemaking obligations imposed on the SEC by Dodd-Frank and the JOBS Act. The effectiveness of the SEC in future rulemaking and the ability of its rules to survive legal challenge are currently under scrutiny.

This article critically evaluates the Business Roundtable decision in the context of the applicable statutory and structural constraints on SEC rulemaking. Toward that end, the essay questions …

A Transactional Genealogy Of Scandal: From Michael Milken To Enron To Goldman Sachs, William W. Bratton, Adam J. Levitin

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Three scandals have reshaped business regulation over the past thirty years: the securities fraud prosecution of Michael Milken in 1988, the Enron implosion of 2001, and the Goldman Sachs “ABACUS” enforcement action of 2010. The scandals have always been seen as unrelated. This Article highlights a previously unnoticed transactional affinity tying these scandals together—a deal structure known as the synthetic collateralized debt obligation involving the use of a special purpose entity (“SPE”). The SPE is a new and widely used form of corporate alter ego designed to undertake transactions for its creator’s accounting and regulatory benefit.

The SPE remains mysterious …

A Theory Of Preferred Stock, William W. Bratton, Michael L. Wachter

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No abstract provided.

Shareholder Eugenics In The Public Corporation, Edward B. Rock

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In a world of active, empowered shareholders, the match between shareholders and public corporations can potentially affect firm value. This article examines the extent to which publicly held corporations can shape their shareholder base. Two sorts of approaches are available: direct/recruitment strategies; and shaping or socialization strategies. Direct/recruitment strategies through which “good” shareholders are attracted to the firm include: going public; targeted placement of shares; traditional investor relations; the exploitation of clientele effects; and de-recruitment. “Shaping” or “socialization” strategies in which shareholders of a “bad” or unknown type are transformed into shareholders of the “good” type include: choice of domicile; …

A Floating Nav For Money Market Funds: Fix Or Fantasy?, Jill E. Fisch, Eric D. Roiter

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The announcement by the Reserve Primary Fund, in September 2008, that it was “breaking the buck,” triggered a widespread withdrawal of assets from other money market funds and led the U.S. Government to adopt emergency measures to maintain the stability of the short term credit markets. In light of these events, the SEC heightened the regulatory requirements to which money market funds – a three trillion dollar industry -- are subject. Regulators and commentators continue to press for further regulatory change, however. The most controversial reform proposal would eliminate the ability of money market funds to purchase and sell shares …

Making Sense Of The New Financial Deal, David A. Skeel Jr.

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In this Essay, I assess the enactment and implications of the Dodd-Frank Act, Congress’s response to the 2008 financial crisis. To set the stage, I begin by very briefly reviewing the causes of the crisis. I then argue that the legislation has two very clear objectives. The first is to limit the risk of the shadow banking system by more carefully regulating the key instruments and institutions of contemporary finance. The second objective is to limit the damage in the event one of these giant institutions fails. While the new regulation of the instruments of contemporary finance—including clearing and exchange …

The Insignificance Of Proxy Access, Marcel Kahan, Edward B. Rock

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No abstract provided.

The Political Economy Of Fraud On The Market, William W. Bratton, Michael L. Wachter

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No abstract provided.

Inside-Out Corporate Governance, David A. Skeel Jr., Vijit Chahar, Alexander Clark, Mia Howard, Bijun Huang, Federico Lasconi, A.G. Leventhal, Matthew Makover, Randi Milgrim, David Payne, Romy Rahme, Nikki Sachdeva, Zachary Scott

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Until late in the twentieth century, internal corporate governance—that is, decision making by the principal constituencies of the firm—was clearly distinct from outside oversight by regulators, auditors and credit rating agencies, and markets. With the 1980s takeover wave and hedge funds’ and equity funds’ more recent involvement in corporate governance, the distinction between inside and outside governance has eroded. The tools of inside governance are now routinely employed by governance outsiders, intertwining the two traditional modes of governance. We argue in this Article that the shift has created a new governance paradigm, which we call inside-out corporate governance.

Using the …

Securities Intermediaries And The Separation Of Ownership From Control, Jill E. Fisch

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The Modern Corporation and Private Property highlighted the evolving separation of ownership and control in the public corporation and the effects of that separation on the allocation of power within the corporation. This essay explores the implications of intermediation for those themes. The article observes that intermediation, by decoupling economic ownership and decision-making authority within the shareholder, creates a second layer of agency issues beyond those identified by Berle and Means. These agency issues are an important consideration in the current debate over shareholder empowerment. The article concludes by considering the hypothetical shareholder construct implicit in the Berle and Means …

Lyondell: A Note Of Approbation, William W. Bratton

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No abstract provided.

Tracking Berle's Footsteps: The Trail Of The Modern Corporation's Law Chapter, William W. Bratton, Michael L. Wachter

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No abstract provided.

The Case Against Shareholder Empowerment, William W. Bratton, Michael L. Wachter

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No abstract provided.

The Power Of Proxy Advisors: Myth Or Reality?, Stephen Choi, Jill E. Fisch, Marcel Kahan

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Recent regulatory changes increasing shareholder voting authority have focused attention on the role of proxy advisors. In particular, greater shareholder empowerment raises the question of how much proxy advisors influence voting outcomes.

This Article analyzes the significance of voting recommendations issued by four proxy advisory firms in connection with uncontested director elections. We find, consistent with press reports, that Institutional Shareholder Services (ISS) is the most powerful proxy advisor and that, of the others, only Glass, Lewis & Co. seems to have a meaningful impact on shareholder voting. This Article also attempts to measure the impact of voting recommendations on …

Heedless Globalism: The Sec's Roadmap To Accounting Convergence, William W. Bratton

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The Securities Exchange Commission (SEC) has introduced a "Roadmap" that describes a process leading to mandatory use of International Financial Reporting Standards (IFRS) by domestic issuers by 2014. The SEC justifies this initiative on the grounds that global standardization yields cost savings and an ultimate gain in comparability, facilitating the search for global opportunities by u.s. investors and making u.s. capital markets more attractive to foreign issuers. This Article shows that the offered justification is inadequate. The SEC frames the matter as a choice between two institutional frameworks for standard setting, holding out high quality sets of standards, asking which …

Confronting The Circularity Problem In Private Securities Litigation, Jill E. Fisch

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Many critics argue that private securities litigation fails effectively either to deter corporate misconduct or to compensate defrauded investors. In particular, commentators reason that damages reflect socially inefficient transfer payments—the so-called circularity problem. Fox and Mitchell address the circularity problem by identifying new reasons why private litigation is an effective deterrent, focusing on the role of disclosure in improving corporate governance. The corporate governance rationale for securities regulation is more powerful than the authors recognize. By collecting and using corporate information in their trading decisions, informed investors play a critical role in enhancing market efficiency. This efficiency, in turn, allows …

Top Cop Or Regulatory Flop? The Sec At 75, Jill E. Fisch

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In their forthcoming article, Redesigning the SEC: Does the Treasury Have a Better Idea?, Professors John C. Coffee, Jr., and Hillary Sale offer compelling reasons to rethink the SEC’s role. This article extends that analysis, evaluating the SEC’s responsibility for the current financial crisis and its potential future role in regulation of the capital markets. In particular, the article identifies critical failures in the SEC’s performance in its core competencies of enforcement, financial transparency, and investor protection. The article argues that these failures are not the result, as suggested by the Treasury Department Blueprint, of a balkanized regulatory system. Rather, …

Neoclassicism And The Separation Of Ownership And Control, Herbert J. Hovenkamp

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"Separation of ownership and control" is a phrase whose history will forever be associated with Adolf A. Berle and Gardiner C. Means' The Modern Corporation and Private Property (1932), as well as with Institutionalist economics, Legal Realism, and the New Deal. Within that milieu the large publicly held business corporation became identified with excessive managerial power at the expense of stockholders, social irresponsibility, and internal inefficiency. Neoclassical economists both then and ever since have generally been critical, both of the historical facts that Berle and Means purported to describe and of the conclusions that they drew. In fact, however, within …