Monthly Archives: December 2016

Insider Trading Flaw: Toward a Fraud-on-The-Market Theory and Beyond

Kenneth R. Davis is Professor of Law and Ethics at Fordham University Gabelli School of Business. This post is based on a recent article by Professor Davis. Related research from the Program on Corporate Governance includes Rethinking Basic by Lucian Bebchuk and Allen Ferrell, discussed on the Forum here.

Since its inception, insider trading law has perplexed the legal community. Scholars have criticized the law for its lack of clarity and over-complexity. Such criticisms are understandable. Insider trading law is a dysfunctional hodge-podge of rules that make little intuitive sense. The problem arises in part because no U.S. statute defines insider trading. Nor does any federal statute specifically prohibit it. Rather, the United States Supreme Court, with minimal congressional guidance, has seized on the general antifraud provision in the Securities Exchange Act of 1934 to construct an incoherent legal regime. Section 10(b) of the Exchange Act makes it unlawful to use “any manipulative or deceptive device” “in connection with the purchase or sale of a security.” The Supreme Court has used this injunction as the starting point to fabricate a confusing brand of insider trading law.


Taxing Top CEO Incomes

Laurence Ales is Associate Professor of Economics and Christopher M. Sleet is Professor of Economics at Carnegie Mellon University’s Tepper School of Business. This post is based on a forthcoming article by Professor Ales and Professor Sleet.

In our article, Taxing Top CEO Incomes, we ask: what should the marginal income tax rate on high earning CEOs be? Recent research suggests that it should be high, perhaps as high as 70 per cent or 80 per cent. This research is based on a formula due to Diamond and Saez (2011) that relates the optimal marginal tax rate on top incomes to the elasticity of income with respect to taxes and a property of the right tail of the earnings distribution. This formula is derived under the assumption that the policymaker’s objective is to maximize tax revenues derived from top earners. It abstracts from any positive impact of the efforts of these earners on the incomes of other agents or on tax revenues collected from other sources. Our article departs from this research by taking seriously the idea that the activities of high earning CEOs, an important group of top earners, have positive spillovers for others. We use a firm-CEO assignment framework to model the market for CEO effective labor. Gabaix and Landier (2008) and Terviö (2008) have shown that such a framework is valuable for understanding recent growth in CEO incomes and the interaction of firm and CEO attributes in shaping this growth. We show that in an assignment model (augmented with a CEO effort choice), the taxation of CEO incomes affects the equilibrium pricing of CEO effective labor and, hence, spills over and affects firm profits. At our benchmark parameterization, a full reform of CEO income and profit taxation entails an optimal marginal tax on top CEO incomes of about 15 per cent.


The Case Against Fiduciary Entity Veil Piercing

Mohsen Manesh is Associate Professor at University of Oregon School of Law. This post is based on a forthcoming article authored by Professor Manesh. This post is part of the Delaware law series; links to other posts in the series are available here.

When two of the nation’s leading business law jurists question a judge-made doctrine of a relatively recent vintage for giving rise “to a particularly odd pattern of routine veil piercing,” [1] one senses that a doctrinal change may be stirring. In this case, those two jurists are Delaware Chief Justice Leo Strine and Delaware Vice-Chancellor Travis Laster. And the legal doctrine the judicial pair decry is the one announced just 25 years ago in In re USACafes, L.P. [2]

In USACafes, the Delaware Chancery Court held that where the general partner of a limited partnership (“LP”) is itself a corporation—rather than a natural person—the directors of the corporate general partner owe a fiduciary duty directly to the limited partners of the LP. Because it was decided in the context of an LP—addressing who owes fiduciary duties to the limited partners of an LP—USACafes is often conceived of as a doctrine of LP law. But to marginalize USACafes as an LP law doctrine neglects its corporate law ramifications. USACafes is as much a corporate law doctrine, dictating to whom corporate directors owe a fiduciary duty. And this says nothing about USACafes’ application to corporate affiliates, controlling shareholders, LLCs, and other business arrangements. Indeed, stated generally, the doctrine of USACafes holds that whenever a business entity (a “fiduciary entity”) exercises control over and, therefore, stands in a fiduciary position to another business entity (the “beneficiary entity”), those persons exercising control, whether directly or indirectly, over the fiduciary entity (the “controller(s)”) owe a fiduciary duty to the beneficiary entity and its owners.

Proxy Access Test Drive Hits a Wall

Cydney S. Posner is special counsel in the public companies group at Cooley LLP. This post is based on a Cooley publication, and follows two previous publications on the use of proxy access, available here and here. Related research from the Program on Corporate Governance includes The Case for Shareholder Access to the Ballot by Lucian Bebchuk; and Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

You probably recall that, on November 9, 2016, GAMCO Asset Management Inc. (entity affiliated with activist investor Mario Gabelli) and certain affiliates used the proxy access bylaws recently adopted at National Fuel Gas Company, an NYSE-listed diversified natural gas company, to nominate a candidate for election to the company’s board at its 2017 annual meeting. It was the first known use of proxy access bylaws to make a nomination. Well, that drama is now over—and without so much as a skirmish. In this Schedule 13D/A, filed [November 28, 2016], GAMCO reported that its nominee had “informed GAMCO this morning that he has decided to withdraw [his] name as a candidate for Director of National Fuel Gas Company. GAMCO will not pursue Proxy Access.” So much for that foray.


Why Enron Remains Relevant

Michael W. Peregrine is a partner at McDermott Will & Emery LLP. This post is based on an article by Mr. Peregrine; his views do not necessarily reflect the views of McDermott Will & Emery or its clients.

The fifteenth anniversary of the Enron bankruptcy (December 2, 2001) provides an excellent opportunity for the general counsel to review with a new generation of corporate officers and directors the problematic board conduct that proved to have seismic and lasting implications for corporate governance. The self-identified failures of Enron director oversight not only led to what was at the time the largest bankruptcy in U.S. history, but also served as a leading prompt for the enactment of the Sarbanes-Oxley Act, and the corporate responsibility movement that followed. For those reasons, the Enron bankruptcy remains one of the most consequential governance developments in corporate history.


Weekly Roundup: November 25–December 1, 2016

More from:

This roundup contains a collection of the posts published on the Forum during the week of November 25–December 1, 2016.

When Is a “Final Offer” Not Final?

Program Hiring Post-Graduate Academic Fellows

2016 Shareholder Activism Insight Report

Marc Weingarten and Eleazer Klein are partners at Schulte Roth & Zabel LLP. This post is based on portions of the 2016 Shareholder Activism Insight report by Mr. Weingarten, Mr. Klein, and Jim McNally, published by Schulte Roth & Zabel in association with Activist Insight and FTI Consulting, available here. 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 Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

In June and July of 2016, Schulte Roth & Zabel commissioned Activist Insight and FTI Consulting to interview 37 respondents from different activist firms. The survey sample consisted of economic activist funds with combined assets under management of $153 billion that have engaged over 420 companies in more than 50 countries in public activist campaigns since 2010, including some of the largest and most high-profile situations. Respondents were asked about their experience with shareholder activism in their respective regions and their expectations for activity in the next 12 months. All respondents are anonymous and results are presented in aggregate.


OM&A Updated Guidance on Tender Offers

James J. Moloney is a partner at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn publication by Mr. Moloney, Andrew L. Fabens, and Glenn R. Pollner.

On Friday, November 18, 2016, the Staff in the Office of Mergers & Acquisitions (“OM&A”) in the Division of Corporation Finance (the “Staff”) at the Securities and Exchange Commission released several new Compliance and Disclosure Interpretations (“C&DIs”) addressing:

  • the level of disclosure deemed appropriate for compensation arrangements with financial advisors retained in connection with responding to registered tender offers subject to Regulation 14D; and
  • certain timing and structural matters related to “abbreviated” debt tender offers (i.e., tender offers for non-convertible debt securities that can remain open for as little as five business days pursuant to a no-action letter issued in early 2015 available here) subject only to Regulation 14E.


The Impact of Board Gender Composition on Dividend Payouts

Marc Goergen is Professor of Finance at Cardiff Business School and a Research Associate at the European Corporate Governance Institute (ECGI). This post is based on a recent paper by Professor Goergen, Jie Chen, and Woon Sau Leung, both Lecturers in Finance at Cardiff Business School.

Academics have been devoting more and more attention to board gender diversity and its effects over the last two decades. However, most of that literature has a relatively narrow focus as it limits itself to studying the effects of female directors on firm performance and firm value as well as risk taking. Nevertheless, recent literature has adopted a much broader perspective by studying the impact of female directors on various aspects of corporate decision making. This literature tends to concur that female directors and managers have a significant influence on corporate decisions. For example, firms with female directors tend to focus more on corporate social responsibility (CSR) than firms with male directors only. Female directors are also less likely to downsize their workforce. They are also more likely to hire female top executives. Female directors also differ from their male colleagues in other ways: they tend to make fewer acquisitions and for those acquisitions they make they typically offer a lower premium to the target shareholders. They also make less risky financing and investment choices, such as taking out less debt. Finally, companies with female directors have also been found to subject their insider directors to greater pay-performance sensitivity and CEO turnover is also more sensitive to performance.


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