Yearly Archives: 2017

Delaware Blockchain Initiative: Transforming the Foundational Infrastructure of Corporate Finance

Posted by Andrea Tinianow, Delaware Blockchain Initiative and Caitlin Long, Symbiont, on
Thursday, March 16, 2017
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Andrea Tinianow is Director of Delaware Blockchain Initiative and Caitlin Long is Chairman & President of Symbiont. This post is part of the Delaware law series; links to other posts in the series are available here. Additional posts related to the blockchain initiative are available here.

The foundation for much of American corporate finance is Delaware corporate law. Later this year, a small change to Delaware corporate law, if enacted, could facilitate a major simplification of the plumbing of the financial system built on top of that foundation. The change is part of the Delaware Blockchain Initiative (DBI), which then-Governor Jack Markell introduced in May 2016. The initiative will allow for the application of distributed ledger technology to many of the private sector’s most basic and critical legal documents, which companies currently file with the Delaware Division of Corporations.

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The First Block in the Chain: Proposed Amendments to the DGCL Pave the Way for Distributed Ledgers and Beyond

Posted by Matthew J. O’Toole and Michael K. Reilly, Potter Anderson & Corroon LLP, on
Thursday, March 16, 2017
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Matthew J. O’Toole and Michael K. Reilly are partners at Potter Anderson & Corroon LLP. This post is based on a Potter Anderson publication by Mr. O’Toole, Mr. Reilly, and David B. DiDonato. The views expressed herein are solely those of the authors and do not necessarily represent the views of the firm or its clients. This post is part of the Delaware law series; links to other posts in the series are available here. Additional posts related to the blockchain initiative are available here.

On May 2, 2016, Delaware’s Governor announced the official public launch of the “Delaware Blockchain Initiative.” [1] The primary goal of the initiative is to encourage the adoption of blockchain technology in the private and public sectors for the benefit of both private enterprises and the public. [2] As part of the initiative, the Governor requested that the Council of the Corporation Law Section of the Delaware State Bar Association (which we refer to herein as the Council) begin to explore whether any changes or clarifications should be made to the General Corporation Law of the State of Delaware (commonly referred to as the DGCL) to enable Delaware corporations to utilize blockchain technology for the registration and transfer of record ownership of shares of stock. [3]

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Diversity Investing

Posted by Alberto Manconi, Bocconi University, on
Thursday, March 16, 2017
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Alberto Manconi is Assistant Professor of Finance at Bocconi University. This post is based on a recent paper authored by Mr. Manconi; Oliver G. Spalt, Professor of Behavior Finance at Tilburg University; and Antonino Emanuele Rizzo, Tilburg University.

In March 2015, a group of public investment funds, collectively managing assets in excess of one trillion dollars, submitted a petition to the SEC which asks for enhanced diversity disclosure for board nominees, arguing that better disclosure on “skills, experiences, gender, race, and ethnic diversity can help us as investors determine whether the board has the appropriate mix to manage risk and avoid groupthink.” [1] Echoing this argument, a large management literature supports the importance of management team “diversity,” defined as variation among the top managers in functional backgrounds, industry and firm tenure, education, and other characteristics that define an executive’s “cognitive frame.” In contrast to an extensive body of work on diversity in other fields, there is comparatively little work on top management team diversity in the finance literature.

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Super Hedge Fund

Posted by Sharon Hannes, Tel Aviv University, on
Wednesday, March 15, 2017
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Sharon Hannes is Dean and Professor of Law at Tel Aviv University Faculty of Law. This post is based on recent article by Professor Hannes.

Activist hedge funds revolutionized corporate America and generated both excitement and criticism alike. This article suggests that a novel market mechanism, a “super hedge fund,” would maintain the benefits of hedge fund activism, while curbing its downsides. The super hedge fund would not really be a fund but, rather, a contractual arrangement among a broad group of institutional investors and a task force of financial experts. The task force would pool together the potency of the institutional shareholders in a sophisticated manner and then unleash its sting on target corporations. Unlike current hedge fund activism, the super hedge fund would not necessitate substantial financing or purchase of securities and, therefore, would be extremely efficient and highly accessible. Importantly, the super hedge fund mechanism is designed to ensure that its incentives are closely aligned with the interests of the long-term shareholders of the targeted corporations. Hence, the new mechanism should respond to the claims of short-termism lodged at current hedge fund activism.
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SEC Enforcement: 2016 in Review and Looking Ahead to 2017

Posted by William R. McLucas and Douglas J. Davison, WilmerHale LLP, on
Wednesday, March 15, 2017
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William R. McLucas and Douglas J. Davison are partners at WilmerHale LLP. This post is based on a co-publication from WilmerHale and Ankura Consulting Group by Mr. McLucas, Mr. Davison, Lauren J. Schreur, Martin S. Wilczynski and Steven E. Richards.

Enforcement activity increased again in fiscal year 2016, and the U.S. Securities and Exchange Commission (“SEC”) continued to pursue a broad agenda. Consistent with former Chair Mary Jo White’s “broken windows” enforcement policy, the Division of Enforcement brought actions “that spanned the spectrum of the securities industry.” In total, the SEC brought 868 enforcement actions, the most in the agency’s history. Of the 868 actions, 548 were “stand alone” cases, another SEC record. The actions resulted in over $4 billion in disgorgement and penalties, down just slightly from fiscal year 2015’s record of $4.19 billion.

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The Dealmaking State

Posted by Steven Davidoff Solomon, UC Berkeley School of Law, and David Zaring, The Wharton School, on
Tuesday, March 14, 2017
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Steven Davidoff Solomon is Professor of Law at the UC Berkeley School of Law and David T. Zaring is Associate Professor at the Wharton School at the University of Pennsylvania. The following post is based on a recent paper by Professor Davidoff Solomon and Professor Zaring. Additional posts addressing legal and financial implications of the Trump administration are available here.

In The Dealmaking State, we consider the consequences if deals became a principal mechanism for the promulgation of government policy, overseen by an executive who promises to be the dealmaker in chief. We also recommend that some useful constraints on the practice be adopted.

We do so because with a deal-making president in the White House—an entrepreneur who co-wrote a book titled The Art Of The Deal, who uses the language of deals to describe his approach to policy, and who has identified a number of ways the private sector can be utilized to meet his goals—the state looks set for an expansion of dealmaking as an ordinary governance strategy.

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Board of Directors Compensation: Past, Present and Future

Posted by Diane Lerner, Pay Governance LLC, on
Tuesday, March 14, 2017
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Diane Lerner is a Managing Partner at Pay Governance LLC. This post is based on a Pay Governance publication authored by Ms. Lerner.

There has been a massive shift in how outside Board Directors have been paid over the past 20 years. This has largely been fueled by changes in corporate governance practices over time. Overall, the shift has been away from paying Directors like executives and towards paying outside experts for their time and contributions during their term of service.

Historical Context

Twenty years ago, the Director pay model at a large corporation often had the following features:

  • directors were commonly eligible for certain benefits programs and pensions;
  • vesting schedules for equity awards were 3 or 4 years long, similar to those for executives;
  • equity awards were in the form of stock option grants (also used for executives), and Director awards were expressed as a number of shares rather than a grant value;
  • many companies did not differentiate pay for Committee service; and
  • Lead Director roles and Director stock ownership guidelines were absent.

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Is Disgorgement a “Forfeiture” for Statute of Limitations Purposes?

Posted by Jon Eisenberg, K&L Gates LLP, on
Tuesday, March 14, 2017
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Jonathan N. Eisenberg is partner in the Government Enforcement practice at K&L Gates LLP. This post is based on a K&L Gates publication by Mr. Eisenberg.

In Gabelli v. SEC, 133 S.Ct. 1216 (2013), the Supreme Court held that the five-year statute of limitations in 28 U.S.C. §2462, which applies to actions for penalties, fines and forfeitures, begins to run when a violation is complete rather than when it is later discovered. The Court quoted Chief Justice Marshall’s statement from more than two centuries ago that it “would be utterly repugnant to the genius of our laws” if actions for penalties could “be brought at any distance of time,” id. at 1223 (internal citation omitted), and it described the important policies served by statutes of limitations as follows:

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Defusing the Antitrust Threat to Institutional Investor Involvement in Corporate Governance

Posted by Edward B. Rock, New York University School of Law, and Daniel L. Rubinfeld, NYU School of Law, on
Monday, March 13, 2017
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Edward B. Rock is Professor of Law at New York University School of Law; and Daniel L. Rubinfeld is Professor of Law at NYU School of Law and Robert L. Bridges Professor of Law Emeritus and Professor of Economics Emeritus at the University of California, Berkeley. This post is based on recent paper by Professor Rock and Professor Rubinfeld.

For the past thirty years, regulatory reform efforts have focused on encouraging diversified institutional investor involvement in corporate governance. Now, some recent economic research threatens to chill these developments. In Azar, Schmalz and Tecu (working paper 2015) and Azar, Raina and Schmalz (working paper 2016), the authors argue that concentration among shareholdings by institutional investors has led to higher prices in two relatively concentrated industries: airlines and banking. Based on this research, Einer Elhauge (2016) has argued that current ownership patterns by diversified institutional investors violate Section 7 of the Clayton Act. Following on Elhauge’s piece, Posner, Scott Morton and Weyl (working paper 2016) propose a “solution” in which diversified investors would be limited to acquiring one firm in any oligopolistic industry.

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Acting SEC Chair’s Steps to Centralize the Process of Issuing Formal Orders—Are Commentators Drawing the Right Lessons?

Posted by Matthew C. Solomon and Elizabeth (Lisa) Vicens, Cleary Gottlieb Steen & Hamilton LLP, on
Monday, March 13, 2017
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Matthew C. Solomon and Elizabeth (Lisa) Vicens are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Solomon, Ms. Vincens, Alexander Janghorbani, and Mark E. McDonald.

Several sources have reported that Acting SEC Chair Michael Piwowar recently issued a directive mandating that only the Acting Director of the Division of Enforcement can authorize the issuance of formal orders of investigation, the means by which the SEC authorizes its investigative staff to issue subpoenas. [1] The change—which reportedly strips approximately 20 Enforcement Division senior officers of the power to authorize formal orders—was not announced publicly and is not reflected in the SEC’s Enforcement Manual.

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