Yearly Archives: 2016

Omnicare, Legal Risk Disclosure and Corporate Governance

Posted by Donald Langevoort, Georgetown University Law Center & Hillary A. Sale, Washington University School of Law, on

Wednesday, April 27, 2016

Boards of Directors, Caremark, Compliance and disclosure interpretation, Delaware law, Director liability, Disclosure, Fiduciary duties, Liability standards, Oversight, Rule 10b-5, Securities Act, Securities fraud, Securities litigation, Securities regulation, Supreme Court
More from: Donald Langevoort, Hillary Sale

Donald Langevoort is a Professor of Law at the Georgetown University Law Center and Hillary A. Sale is the Walter D. Coles Professor of Law at Washington University School of Law. This post is based on an article authored by Professor Langevoort and Professor Sale.

The Supreme Court’s 2015 decision in Omnicare Inc. v. Laborers District Council Construction Industry Pension Fund is an extended exercise in corporate discourse theory. Omnicare’s registration statement for a public offering under the Securities Act of 1933 stated the company’s belief that its marketing practices to certain kinds of pharmacies were lawful. Later the government decided that they were not, and took legal action against the company, imposing sizable sanctions.

The question before the Court was whether and when that statement of belief could be found false or misleading other than by proof that the issuer’s genuine opinion at the time was different from what it stated. The Court said it might, because words in context can generate inferences for the reasonable investor that go beyond narrow linguistic confines. The statement of opinion could imply something about how the belief was formed that might be untrue, or that certain facts do not exist when in fact they do. Thus the case was remanded for further proceedings, in particular to consider evidence that a lawyer had described one of Omnicare’s contracts as high-risk. Did that or anything similar uncovered by plaintiffs render the unqualified compliance opinion misleading even if genuinely believed?
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The Economics and Finance of Hedge Funds

Posted by Vikas Agarwal, Georgia State University, on

Wednesday, April 27, 2016

Asset management, Financial institutions, Financial reporting, Fund managers, Hedge funds, Incentives, Investor horizons, Liquidity, Performance measures, Risk management, Risk-taking, Shareholder activism, Systemic risk
More from: Kevin Mullally, Narayan Naik, Vikas Agarwal

Vikas Agarwal is Professor of Finance at Georgia State University. This post is based on an article authored by Professor Agarwal; Kevin Mullally, Doctoral Candidate at Georgia State University; and Narayan Naik, Professor of Finance at London Business School. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here), and The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here).

Critics of hedge funds often label hedge funds as greedy, corrupt, and highly compensated villains who disrupt and pose a threat to financial markets and force corporations to change to policies that destroy firm value. Proponents of hedge funds view them as informed traders who improve market quality and corporate governance. Despite these opposing views, the hedge fund industry has continued to grow at an astounding pace. According to an estimate by Hedge Fund Research, Inc. (HFR) assets in the industry increased from $39 billion in 1990 to about $3 trillion in 2015. Moreover, hedge funds now own a larger fraction of the US stock market with percentage ownership increasing from 3% in 2000‒2003 to 9% during 2008‒2012.

In our paper, The Economics and Finance of Hedge Funds: A Review of the Academic Literature, which was recently published in Foundations and Trends in Finance, we provide a comprehensive survey of the academic literature focused on the hedge fund industry. Although data on hedge funds is still relatively limited when compared to other investment vehicles such as mutual funds, researchers have managed to study a number of topics related to this industry.

Articles by Bebchuk, Coates and Fried Voted to be Among the Top Ten Corporate and Securities Articles of 2015

Posted by Kobi Kastiel, Co-Editor, HLS Forum on Corporate Governance and Financial Regulation, on

Tuesday, April 26, 2016

Corporate Practice Commentator, Harvard Law School, Program on Corporate Governance
More from: Jesse Fried, John Coates, Lucian Bebchuk

The Corporate Practice Commentator announced last week the list of the Ten Best Corporate and Securities Articles selected by an annual poll of corporate and securities law academics. The list includes three articles from Harvard Law faculty associated with the Program on Corporate Governance, Professors Lucian Bebchuk, John Coates, and Jesse Fried.

The top ten articles were selected from a field of more than 540 pieces. Professor Robert Thompson of Georgetown Law School conducted the annual poll.

The selected Bebchuk, Coates, and Fried articles are:

Bebchuk, Lucian, Alon Brav and Wei Jiang. The Long-term Effects of Hedge Fund Activism. 115 Colum. L. Rev. 1085-1155 (2015) (available here and discussed on the Forum here).
Coates, John C. IV. Cost-benefit Analysis of Financial Regulation: Case Studies and Implications. 124 Yale L. J. 882-1011 (2015) (available here and discussed on the Forum here).
Fried, Jesse M. The Uneasy Case for Favoring Long-term Shareholders. 124 Yale L. J. 1554-1627 (2015) (available here and discussed on the Forum here).

Additional information about the best corporate and securities law articles of 2015 and the selection process is available here.

Rollout of Proposed Rule on Incentive Pay

Posted by Heather L. Coleman, Sullivan & Cromwell LLP, on

Tuesday, April 26, 2016

This post is based on a Sullivan & Cromwell LLP publication authored by Heather L. Coleman, Marc Trevino, Glen T. Schleyer, and Amanda K. Toy. Related research from the Program on Corporate Governance includes Regulating Bankers’ Pay by Lucian Bebchuk and Holger Spamann; The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008 by Lucian Bebchuk, Alma Cohen, and Holger Spamann; How to Fix Bankers’ Pay by Lucian Bebchuk; and Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried.

[On April 21, 2016], the National Credit Union Administration issued a notice of proposed rulemaking for a new interagency rule on incentive-based compensation that applies to financial institutions with consolidated assets of at least $1 billion. This new proposal replaces one originally issued 5 years ago in the first half of 2011. The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency and the Securities and Exchange Commission are all expected to propose the same new rule.

SEC Scrutiny of Secondary Market Trading

Posted by Susan S. Muck and Michael S. Dicke, Fenwick & West LLP, on

Monday, April 25, 2016

Susan S. Muck and Michael S. Dicke are partners in the Securities Litigation practice of Fenwick & West LLP. This post is based on a Fenwick publication by Ms. Muck and Mr. Dicke.

In an unprecedented one-day blitz, the Chair of the Securities and Exchange Commission was joined by the SEC Enforcement Director in events in Silicon Valley and San Francisco on March 31 focused on one message: the SEC is closely watching the conduct of private companies as well as emerging platforms that trade in private company securities, and will bring enforcement cases as needed to protect investors. Dubbed the “Silicon Valley Initiative,” the senior officials emphasized that although the SEC wants to encourage capital formation for innovative Bay Area companies, because they play such a critical role in our economy and our markets, the SEC expects even private companies to embrace and demonstrate sound corporate governance.

The Governance Gap in Fragmented Markets

Posted by Yesha Yadav, Vanderbilt Law School, on

Monday, April 25, 2016

Algorithmic trading, Capital markets, Conflicts of interest, Dark pools, Equity capital, High-frequency trading, Information asymmetries, Information environment, Liquidity, Market efficiency, NASDAQ, NYSE, Oversight, Systemic risk
More from: Yesha Yadav

Yesha Yadav is an Associate Professor of Law of Vanderbilt Law School. This post is based on an article authored by Professor Yadav.

The firestorm of controversy surrounding IEX’s efforts to gain recognition as a national exchange showcases the enormous economic and popular power of exchanges in the marketplace. [1] Exchanges have long offered an organized space for companies to list their securities and for traders to transact in the risk of these securities with one another, ultimately helping investors direct money towards productive, profitable businesses. Today, major exchanges like the NYSE and the NASDAQ intermediate billions of dollars in trades daily and list the securities of companies collectively valued in the tens of trillions. [2]

Key Points from the OCC’s Financial Innovation Paper

Posted by Dan Ryan, PricewaterhouseCoopers LLP, on

Sunday, April 24, 2016

Banks, CFPB, Consumer protection, FDIC, Federal Reserve, Financial institutions, Financial regulation, Financial technology, Innovation, Investor protection, OCC, Risk management, Risk oversight
More from: Adam Gilbert, Armen Meyer, Dan Ryan, Haskell Garfinkel, Mike Alix, PricewaterhouseCoopers

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mike Alix, Haskell Garfinkel, Adam Gilbert, and Armen Meyer.

The Office of the Comptroller of the Currency (OCC) released its highly anticipated white paper on financial technology innovation last week. The agency offered few details regarding its supervisory approach, but it did tip its hand regarding its areas of interest, which include banks’ risk management practices, relationships with third parties, and consumer protection and access. The OCC has historically sought to promote expansion of the banking industry through innovation and improved competitiveness, so it is no surprise that it is the first US banking regulator to formally act. [1]
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Brexit: Possible Options and Impact

Posted by Barnabas Reynolds, Shearman & Sterling LLP, on

Saturday, April 23, 2016

Brexit, Cross-border transactions, EU, Europe, Financial institutions, Financial regulation, Human rights, International governance, Jurisdiction, Regulators, UK
More from: Barnabas Reynolds, James Webber, Thomas Donegan, Shearman & Sterling

Barnabas Reynolds is head of the global Financial Institutions Advisory & Financial Regulatory Group at Shearman & Sterling LLP. This post is based on a Shearman & Sterling client publication by Mr. Reynolds, Thomas Donegan, and James Webber. The complete publication, including footnotes and annex, is available here.

The UK is holding a referendum on 23 June 2016 to decide whether or not to remain a member of the European Union. There seems to be a disconnect between some aspects of public discourse on the vote and the actual effect of an in or out vote. A vote to leave would have numerous possible legal consequences but, if the UK rejoins the EEA, the passporting regime for financial institutions and “free movement of persons” would continue. A vote to remain would also kick off a process to change the UK’s relationship with the rest of the EU. This post discusses potential legal issues arising from a Brexit.

Dieckman v. Regency: Limited Partnerships and Fiduciary Duties

Posted by Robert C. Schwenkel, Fried, Frank, Harris, Shriver & Jacobson LLP, on

Friday, April 22, 2016

Boards of Directors, Conflicts of interest, Contracts, Delaware cases, Delaware law, Disclosure, Duty of good faith, Fiduciary duties, Merger litigation, Mergers & acquisitions, Partnerships, Related party transactions, Safe harbor
More from: Gail Weinstein, Robert Schwenkel, Steven Epstein, Warren de Wied, Fried Frank

Robert C. Schwenkel is a partner in the M&A and Private Equity Practices of Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Mr. Schwenkel, Warren S. de Wied, Steven Epstein, and Gail Weinstein. This post is part of the Delaware law series; links to other posts in the series are available here.

In Dieckman v. Regency (March 29, 2016), the Court of Chancery again confirmed that the contractual arrangements set forth in a limited partnership agreement will define the respective rights and obligations of the partners, including with respect to the general partner’s fiduciary duties (and related duty of disclosure) in connection with affiliated transactions. The decision continues the Delaware courts’ general approach of providing the highest level of protection against limited partners’ challenges to transactions between a master limited partnership and its general partner or the general partners’ affiliates—so long as:

the partnership agreement clearly limits or eliminates fiduciary duties and provides a clear process for approval of the transaction (a so-called “safe harbor,” which typically involves approval by a conflicts committee of the general partner); and
the process established in the partnership agreement is followed.

Endogenous Legal Traditions and Economic Outcomes

Posted by Carmine Guerriero, University of Amsterdam, on

Friday, April 22, 2016

Diversity, Efficiency, Financial regulation, Globalization, International governance, Labor markets, Legal systems, Market efficiency, Social policies, Stakeholders
More from: Carmine Guerriero

Carmine Guerriero is Assistant Professor of Economics at the University of Amsterdam. This post is based on a recent article by Professor Guerriero.

The “legal origins” theory claims that the two main legal traditions or origins, civil law and common law, crucially shape lawmaking and dispute adjudication and have not been reformed after the initial exogenous transplantation by Europeans. [1] Therefore, they affect economic outcomes to date. In particular, countries that received common law enjoy today “(a) improved financial development […], (b) […] better functioning labor markets […], and (c) less formalized and more independent judicial systems” [La Porta et al. 2008, p. 298].

Recent contributions, however, have criticized the ideas that transplanted legal traditions remained intact (Roe, 2004) and can be measured through legal origins dummies (Rosenthal and Voeten, 2007). Inspired by these studies, Guerriero (2016a) documents that in a cross-section of 155 transplants, which are countries that received their legal tradition externally, 25 reformed their lawmaking institution and 95 reformed at least one among their lawmaking and adjudication institutions. To illustrate, in countries that inherited statute law, reforms towards case law have been more likely the largest preference, and in particular both ethnic and genetic, diversity is and reforms towards a pure common law tradition, which is the mix of case law and some discretion in adjudication, are found where the quality of political institutions is the lowest. Symmetrically, in countries in which case law was transplanted, reforms towards a pure civil law tradition, which is the mix of statute law and bright-line adjudication rules, are found where the quality of political institutions is the highest. This evidence is consistent with the idea that appellate judges’ offsetting biases make common law unbiased but volatile and thus more efficient than the certain civil law only when the latter is sufficiently distorted by special interests, i.e., if preferences are sufficiently heterogeneous and/or the political process sufficiently inefficient.

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