Don’t Discourage Outside Shareholders

The New York Times DealBook published today a piece I wrote, titled Don’t Discourage Outside Shareholders. The piece, available here, focuses on the SEC’s ongoing consideration of a rulemaking petition that advocates tightening the rules governing how quickly shareholders must disclose when they hold 5 percent or more of a company’s shares. I argue that such tightening could well unduly discourage the creation and activism of outside blockholders.

In contrast to the claims of the petition’s authors, the proposal should not be viewed as a “technical” closing of a loophole but rather as one that raises significant policy issues. In considering these issues, considerable weight should be given to the significant empirical evidence that the presence and involvement of outside blockholders enhances a company’s value and performance. Furthermore, the rules governing the balance of power between incumbents and outside blockholders are now substantially tilted in favor of insiders — both relative to earlier times and to other countries — rather than outside shareholders. This tilt counsels against tightening SEC rules in ways that would further disadvantage outsiders.

The SEC would do well to conduct a comprehensive examination of the rules governing the balance of power between incumbent directors and outside blockholders. In the meantime, however, the SEC should void the proposed tightening; existing research and evidence raise significant concerns that such a tightening would hurt investors and the economy.

The DealBook piece builds on a study I co-authored with Robert Jackson, The Law and Economics of Blockholder Disclosure, forthcoming in the Harvard Business Law Review. The study analyzes in detail the costs and benefits of the proposed tightening and is available here.