Monthly Archives: May 2017

Snap and the Rise of No-Vote Common Shares

Ken Bertsch is Executive Director at the Council of Institutional Investors. This post is based on Mr. Bertsch’s recent remarks to the SEC Investor Advisory Committee. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock by Lucian Bebchuk and Kobi Kastiel (discussed on the Forum here).

Snap Inc.’s IPO [on March 2, 2017], featuring public shares with no voting rights, appears to be the first no-vote listing at IPO on a U.S. exchange since the New York Stock Exchange (NYSE) in 1940 generally barred multi-class common stock structures with differential voting rights.

Members of the Council of Institutional Investors have watched with rising alarm for the last 30 years as global stock exchanges have engaged in a listing standards race to the bottom. With NYSE-listed Snap’s arrival with “zero” rights for public shareholders, perhaps the bottom has been reached.


Bank Governance and Systemic Stability: The “Golden Share” Approach

Saule T. Omarova is a Professor at Cornell Law School. This post is based on her recent article, forthcoming in the Alabama Law Review.

The global financial crisis of 2008 has underscored the urgent need for deep rethinking of how financial firms ought to manage risk, and do so not only for the sake of generating good results for themselves and their clients but also for the sake of keeping the entire financial and economic system from collapse. Conceptually, this collective post-crisis “rethinking” effort seems to proceed along two basic lines. Some scholars and policy experts focus on enhanced public regulation and supervision of financial firms and markets—through higher capital standards, mandatory stress testing, greater and faster data collection, etc.—as the key method of minimizing systemic risk. Others, by contrast, see improved private ordering—through strengthening various mechanisms of corporate governance, incentivizing individual firms and their employees to behave ethically, etc.—as the ultimate solution to the same problem.


Weekly Roundup: May 19–May 25, 2017

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This roundup contains a collection of the posts published on the Forum during the week of May 19–May 25, 2017.

It Pays to Write Well

2017 IPO Report

Lead Plaintiffs and Their Lawyers: Mission Accomplished, or More to Be Done?

Adam C. Pritchard is Frances and George Skestos Professor at University of Michigan Law School; Stephen J. Choi is Murray is Kathleen Bring Professor at New York University Law School. This post is based on their recent paper, forthcoming as a chapter in the Research Handbook on Shareholder Litigation.

In our chapter for the forthcoming Research Handbook on Shareholder Litigation, Lead Plaintiffs and Their Lawyers: Mission Accomplished, or More to Be Done? (to be published by Elgar Publishing) we survey the literature relating to the lead plaintiff provision under the Private Securities Litigation Reform Act (PSLRA). Prior to the enactment of the PSLRA in 1995, individual investors served as largely figurehead class representatives. Because class action lawyers typically had a much greater interest in the class recovery than the named class representatives, plaintiffs lacked the incentive to monitor class counsel.


2017 IPO Report

Lia Der Marderosian, Brian Johnson, Erika Robinson, and David Westenberg are partners at Wilmer Cutler Pickering Hale and Dorr LLP. This post is based on a WilmerHale publication.

US Market Review and Outlook


The IPO market produced 98 IPOs in 2016, the second down year in row, coming in 36% below the tally of 152 IPOs in 2015. In the 12-year period preceding 2015, which saw an annual average of 138 IPOs, there were only three years in which IPO totals failed to reach the 100-IPO threshold.

The year started slowly, with the first quarter producing only eight IPOs, but the pace of new offerings subsequently improved and steadied, with the succeeding three quarters producing 30, 31 and 29 IPOs, respectively. The quarterly average of 31 IPOs that has prevailed over the past two years is less than two-thirds the quarterly average of 53 IPOs produced during 2013 and 2014.


Federal Banks’ Permitted Concealment of Material Information and Systemic Risk

Beckwith B. Miller is a Managing Member at Ethics Metrics LLC. This post is based on an Ethics Metrics publication.

On May 8, 2017, Ethics Metrics LLC submitted comments to the SEC, Analysis of Bank Holding Company Disclosures, that address a key issue that arises in the Commission’s 30-year old Industry Guide 3, Statistical Disclosure by Bank Holding Companies as well as in the Financial Stability Board’s Thematic Review of Corporate Governance, dated April 28, 2017.

This critical issue centers on deliberate omissions of material information by U.S. depository institution holding companies (DIHCs), omissions permitted by federal bank regulators, purportedly in the public interest. These disclosure omissions conflict with the duty to disclose material information in the public interest contained in U.S. federal securities laws and the G20/OECD Principles of Corporate Governance (Principles).


Dual-Class Stock and Private Ordering: A System That Works

David J. Berger is Partner at Wilson Sonsini Goodrich & Rosati. This post is based on a Wilson Sonsini publication by Mr. Berger, Steven E. Bochner, and Larry Sonsini. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock by Lucian Bebchuk and Kobi Kastiel (discussed on the Forum here).

Dual-class stock has become the target of heightened attention, particularly in light of Snap’s recent IPO. While the structure remains popular for companies trying to respond to the short-term outlook of public markets—including companies in the technology and media sectors, as well as companies in more traditional industries ranging from shipping and transportation to oil and gas, and everything in between—dual-class stock continues to be the subject of considerable attack by various investor groups and some academics. Further, while a majority of dual-class companies are not technology companies, young technology companies continue to be the primary focus of governance activists. [1]


SEC Enforcement Actions Against Public Companies and Subsidiaries Keep Pace

David Marcus is Senior Vice President at Cornerstone Research; and Stephen Choi is Murray and Kathleen Bring Professor of Law at the New York University School of Law, and Director of the Pollack Center for Law & Business at New York University. This post relates to a report co-authored by the NYU Pollack Center for Law & Business and Cornerstone Research.

This post analyzes data in the Securities Enforcement Empirical Database (SEED), a collaboration between the NYU Pollack Center for Law & Business and Cornerstone Research. SEED is a public online resource that provides data on SEC actions filed against defendants that are public companies traded on major U.S. exchanges and their subsidiaries. This post focuses on actions initiated from fiscal year 2010 through the first half of fiscal year 2017. [1]


Leviathan Inc. and Corporate Environmental Engagement

Hao Liang is Assistant Professor of Finance at Singapore Management University. This post is based on a recent paper authored by Professor Liang; Po-Hsuan Hsu, Associate Professor of Finance at University of Hong Kong; and Pedro Matos, Associate Professor of Business Administration at University of Virginia Darden School of Business.

With the rise of emerging market economies in the last two decades, the role of state capitalism has attracted new attention. In China, companies in which the state is a majority shareholder account for over 60% of total stock market capitalization. Other emerging market governments such as Brazil or Russia also hold majority or significant minority stakes in local companies. These holdings can be direct through central or local governments but also indirect in the form of public pension funds or sovereign wealth funds. This pattern is contrary to that in many Western economies where large-scale privatizations in the 1980s and 1990s led to the decline in the role of the state in business. In the post-privatization era of the early 21st century, some of the world’s largest publicly-listed firms are now state-owned enterprises (SOEs).


Recent Board Declassifications: A Response to Cremers and Sepe

Lucian Bebchuk is James Barr Ames Professor of Law, Economics and Finance, and Director of the Corporate Governance Program, Harvard Law School. Alma Cohen is Professor of Empirical Practice, and Research Director of the Laboratory for Corporate Governance, at Harvard Law School. This post is based on their paper Recent Board Declassifications: A Response to Cremers and Sepe. Related program research includes The Costs of Entrenched Boards by Bebchuk and Cohen and How Do Staggered Boards Affect Shareholder Value? Evidence from a Natural Experiment by Cohen and Wang.

We recently released a short paper, Recent Board Declassifications: A Response to Cremers and Sepe. Our paper responds to a paper released earlier this month by Martijn Cremers and Simone Sepe, Board Declassification Activism: The Financial Value of the Shareholder Rights Project (“CS2017”). We show that the results of CS2017 fail to provide support for the authors’ opposition to annual elections for directors.

In their 2016 published article (“CS2016”), Cremers and Sepe focused on the effects of board declassifications (as well as classifications) that took place through 2011. In CS2016, which relied on a finance working paper written with Lubomir Litov, the authors suggested that the association between staggered boards and lower firm valuation (identified by Bebchuk and Cohen (2005) and confirmed by Faleye (2007) and Frakes (2007)) does not reflect a value-reducing effect of staggered boards. Firm-fixed-effect regressions, Cremers and Sepe argued, show that declassifications bring about a statistically and economically significant reduction in firm value.

Based on this analysis, CS2016 urged a “legal reform that would transform staggered boards into a quasi-mandatory rule.” In particular, they advocated prohibiting shareholders from seeking annual elections by submitting declassification proposals, as well as subjecting all board-initiated declassification proposals to a two-thirds supermajority requirement.

We plan to comment in detail in future work on the methodological problems that afflict the analyses of CS2016 and CS2017, and prevent these analyses from providing a basis for assessing the value effects of staggered boards. In our current paper, however, we leave aside those methodological issues, take the results of CS2017 “as is,” and provide a close reading of these results.

Appropriately interpreted, the results of CS2017 provide some significant evidence that declassifications are beneficial and no evidence that declassifications are value-reducing. Furthermore, the results presented in CS2016 regarding the consequences of declassifications during the pre-2012 period do not hold, and indeed are substantially reversed, for the 2012-2014 period considered by CS2017. On the whole, the results of CS2017 undermine the strong general endorsement of staggered boards put forward by CS2016.

It is worth highlighting that CS2017 retreats from the anti-declassification position of CS2016. Instead, CS2017 takes the position that “[the] evidence indicates that classified boards may serve a positive governance function in some companies, thus challenging the ‘one-size-fits-all’ approach to board declassification.”

Note that, in CS2016, the authors took a one-size-fits-all approach, calling for making staggered boards a “quasi-mandatory arrangement” and for changes that would make it difficult for any company to declassify. This position seems to have disappeared, with Cremers and Sepe now claiming only that classified boards “may” be positive in “some” companies. As we explain in our paper, the results in CS2017 support this retreat.

Our paper is available for download here.

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