Yearly Archives: 2018

Texas Gulf Sulphur and the Genesis of Corporate Liability Under Rule 10b-5

Posted by A.C. Pritchard (University of Michigan) and Robert B. Thompson (Georgetown University), on
Thursday, April 5, 2018
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Adam C. Pritchard is the Frances and George Skestos Professor of Law at University of Michigan Law School and Robert B. Thompson is Peter P. Weidenbruch, Jr. Professor of Business Law at Georgetown University Law Center. This post is based on their recent paper.

Corporate liability for market misrepresentations under Rule 10b-5, the staple of today’s class actions, first took root in the 1960s. Our paper, Texas Gulf Sulphur and the Genesis of Corporate Liability under Rule 10b-5, shows the initial judicial efforts, occurring in the iconic Texas Gulf Sulphur case, to grapple with the extensive corporate liability for material misstatements affecting shares traded in public markets. Texas Gulf Sulphur is mostly known today for transforming insider trading law, but the judges of the Second Circuit hearing that case struggled more with the question of corporate liability.

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Keynote Address of Commissioner Brian Quintenz before the DC Blockchain Summit

Posted by Brian Quintentz, U.S. Commodity Futures Trading Commission, on
Thursday, April 5, 2018
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Brian Quintentz is a Commissioner at the U.S. Commodity Futures Trading Commission (CFTC). This post is based upon Commissioner Quintentz’s recent keynote address at the DC Blockchain Summit. The views expressed in this post are those of Mr. Quintentz and do not necessarily reflect those of the CFTC, his fellow CFTC commissioners, or the CFTC staff.

Good afternoon and thank you for that very kind introduction. As an alumnus, I’m always happy to be back at the McDonough School of Business. It’s great to be with you here at the DC Blockchain Summit. I want to congratulate Perianne and the Chamber of Digital Commerce on hosting such a fascinating event with such robust participation by the DLT and cryptocurrency community. What you have accomplished in advocacy and connectivity in such a short period is incredible.

Before I begin, let me quickly say that the views contained in this speech are my own and do not represent the views of the Commission.

I want to start with a story about my childhood. I have a fraternal twin brother. Growing up, we were pretty competitive—academically, socially, and athletically. One of the sports we both played was tennis. As some of you know, amateur tennis at the juniors, high school, and college level is kind of a unique sport in terms of its rule enforcement. The players themselves act as the referees. But if you think about the landscape of competitive tennis, as the seriousness of the sport and the consequences of winning increase, and the players become professionals, umpires ultimately are called in to officiate the game. The incentives become too skewed for a player to make the right call in a tight situation. I believe we are at that same point with regard to cryptocurrency exchanges where millions, if not billions, of dollars’ worth of products are transferred on a daily basis. Some level of independent officiating is now required.

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How Board Skills Vary by Director Age Groups

Posted by Tomas Pereira, Equilar, Inc., on
Wednesday, April 4, 2018
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Tomas Pereira is a Research Analyst at Equilar, Inc. This post is based on an Equilar publication by Mr. Pereira.

Members of public company boards of directors range in age from early 20s to well over 75. It is true that most directors are closer to retirement age—the median age for a director at Equilar 500 companies was 62.7 in 2017—and board members over 60 are more prevalent overall than their more youthful contemporaries. There are signs that this situation is changing, however, in an effort to improve company overall performance. Though a recently published article featuring research from Equilar found that the age of directors at a company may not have a direct effect on performance, many companies are taking an active approach to refresh stale and aging boards by introducing mandatory retirement ages or term limits.

The business landscape is always changing, and companies are competing to stay relevant. Cognizant companies, aware of this fragile relevancy, often look to younger board members to rejuvenate their strategic approach and theoretically stay ahead of the game.

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Has Section 404 of the Sarbanes-Oxley Act Discouraged Corporate Investment? New Evidence from a Natural Experiment

Posted by Ana Albuquerque (Boston University) and Julie Lei Zhu (Shanghai Advanced Institute of Finance), on
Wednesday, April 4, 2018
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Ana Albuquerque is Associate Professor of Accounting at Boston University Questrom School of Business, and Julie Lei Zhu is Assistant Professor of Accounting at Shanghai Advanced Institute of Finance. This post is based on their recent article, forthcoming in Management Science.

The US Congress’s passage of the Sarbanes-Oxley Act (SOX) in 2002 following a string of high-profile corporate scandals resulted in the most significant change in securities regulation since the Securities Act of 1933. One of the most important components of SOX is Section 404 (SOX404), which is arguably the most contentious and onerous section of the act (Coates and Srinivasan, 2014, and Zhang, 2007). Congress’s objective in creating SOX404 was to increase the reliability of financial statements in order to prevent accounting fraud. Section 404 requires that companies document, test and assess procedures for monitoring their internal systems, that managers file a special “management report”, in which they evaluate the firm’s internal control system on financial reporting, and that the outside auditor attest to the management’s assessment of the companies’ controls. Commentators and empirical evidence suggest that an unintended consequence of SOX, and SOX404 in particular, was a reduction in investment and risk taking (e.g., Bargeron, Lehn, Zutter, 2010; Kang, Liu, Qi, 2010). According to these authors, investing in risky projects increases the likelihood that SOX-compliant firms compromise their internal control systems and disclose material weakness in their management reports, which can trigger a stock price decline or litigation.

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2018 Proxy Season: Early Trends in Pay Ratio Disclosure

Posted by Margaret Engel, Lauren Peek, and Ryan Colucci, Compensation Advisory Partners, on
Wednesday, April 4, 2018
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Margaret Engel is a founding partner, Lauren Peek is a principal, and Ryan Colucci is an associate at Compensation Advisory Partners. This post is based on a CAP publication by Ms. Engel, Ms. Peek, and Mr. Colucci. Related research from the Program on Corporate Governance includes The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein.

Beginning with fiscal years ending on or after December 31, 2017, companies are required to disclose the ratio that compares the compensation of the CEO to the compensation of the median employee (pay ratio). This disclosure was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law in 2010.

Compensation Advisory Partners LLC (CAP) researched early pay ratio disclosures. As of March 9, 2018, we obtained pay ratios from 150 companies with a median revenue of $2.1B from a cross-section of industries.

Pay Ratio

The median pay ratio disclosed by these companies is 87x. The lowest ratio is 1x (Apollo Global Management, Dorchester Minerals and The Carlyle Group) and the highest ratio is 1465x (Fresh Del Monte Produce Inc.).

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2018 Proxy Season Preview

Posted by Shirley Westcott, Alliance Advisors, on
Tuesday, April 3, 2018
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Shirley Westcott is a Senior Vice President at Alliance Advisors LLC. This post is based on an Alliance Advisors publication by Ms. Westcott.

This year’s proxy season will once again bring attention to shifting investor priorities, with environmental and social (E&S) issues at the forefront of engagement discussions and shareholder resolutions. Changes over the past year to the policies and voting practices of several major index investors, along with a bold pronouncement by BlackRock that corporations should “serve a social purpose,” underscore this progression.

How far this trend advances remains to be seen, but it will be a key development to watch throughout proxy season. Money managers are continuing to face pressure from social activists to align their voting practices with their stated positions on climate change—which was a driving force in catapulting three climate risk proposals over the majority threshold in 2017. More recently, elected officials have made demands that investment funds use their financial clout to pressure firearms companies to take steps to reduce gun violence. Activist hedge funds are also taking an increasing interest in corporate sustainability, which could lead to collaborations with other institutional investors on social responsibility campaigns.

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Why Do Investors Hold Socially Responsible Mutual Funds?

Posted by Dr. Arno Riedl and Dr. Paul Smeets (Maastricht University), on
Tuesday, April 3, 2018
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Dr. Arno Riedl is Professor of Economics and Dr. Paul Smeets is Professor of Finance at Maastricht University. This post is based on their recent article, recently published in the Journal of Finance. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Socially responsible investments (SRI) are ever-increasing in importance. But why do investors buy these assets? There are three potential motives: (1) purely financial interest, (2) desire to create a positive social image, or (3) strong pro-social preferences.

The authors analyze a unique data set consisting of administrative data linked to survey responses and an incentivized experiment. The experiment is used to elicit intrinsic social preferences using real financial incentives and participants (investors) know that they will remain anonymous. The importance investors place on their social image is measured by asking them how often they talk about their investments. Only when they talk about their investments others are able to observe that they invest socially responsible. The financial motives are assessed by looking at the actual performance of participants using the administrative data as well as survey data regarding their beliefs about performance of SRI and non-SRI equity funds.

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Broadcom’s Blocked Acquisition of Qualcomm

Posted by Michael Leiter, Ivan Schlager, and Donald Vieira, Skadden, Arps, Slate, Meagher & Flom LLP, on
Tuesday, April 3, 2018
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Michael Leiter, Ivan Schlager, and Donald Vieira are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden publication by Mr. Leiter, Mr. Schlager, Mr. Vieira, Joe Molosky, and Michelle Weinbaum.

President Donald Trump’s recent executive order blocking Broadcom Limited’s acquisition of chipmaker Qualcomm, Inc. (the Order) is the latest in a series of significant actions and statements regarding the national security implications of trade policy. In December 2017, the president released his National Security Strategy, emphasizing economic security as a key component of national security, and specifically focusing on the regulation of international trade and foreign investment as a way to secure U.S. military and technological superiority. On March 12, 2018, President Trump issued the Order, citing national security concerns raised by Broadcom’s potential acquisition of Qualcomm.

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“Forcing the Offer”: Considerations for Deal Certainty and Support Agreements in Delaware Two-Step Mergers

Posted by Piotr Korzynski, Baker & McKenzie LLP, on
Monday, April 2, 2018
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Piotr Korzynski is an associate at Baker & McKenzie LLP. This post is based on a publication by Mr. Korzynski and is part of the Delaware law series; links to other posts in the series are available here. This post represents the views of the author and not necessarily the views of Baker McKenzie LLP.

In the four and a half years since the Delaware legislature adopted Section 251(h) of the Delaware General Corporation Law (DGCL) and offered streamlined mechanics for closing two-step mergers, Delaware practitioners have made increasing use of the provision. The provision, subject to certain conditions, permits an acquiror’s near-simultaneous closing of an exchange or tender offer for a controlling stake in a target in the first transaction step and a merger for the remaining outstanding stake in the target immediately after in a final, second step. In its initial year, Section 251(h) was utilized in over 20% of deals involving Delaware public company targets and 33 of 41 Delaware two-step mergers. [1] In 2014, following the success of that first year, the legislature liberalized the use of Section 251(h) by, among other things, striking the condition that the provision was inapplicable to transactions involving “interested stockholders” (i.e., owners of 15% or more of a target company’s outstanding voting stock at the time of target board approval of the merger agreement). Such condition had restricted Section 251(h) transactions to true third-party transactions and likely depressed its use in the first year. By its third full year, nearly 25% of deals involving Delaware public company targets and 49 of 52 Delaware two-step mergers utilized Section 251(h).

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How a CEO’s Cultural Background Impacts Firm Performance

Posted by Duc Duy Nguyen (University of St Andrews), Jens Hagendorff (University of Edinburgh), and Arman Eshraghi (University of Edinburgh), on
Monday, April 2, 2018
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Duc Duy Nguyen is a lecturer at the University of St Andrews School of Management; Jens Hagendorff is professor of finance at the University of Edinburgh; and Arman Eshraghi is associate professor of finance and accounting at the University of Edinburgh. This post is based on their recent article, forthcoming in the Review of Financial Studies.

Understanding if our individual cultural backgrounds shape the everyday decisions we make is a topic of great interest and resurgent public debate. The commercial success of genealogy websites such as ancestry.com and television shows such as “Who Do You Think You Are” bear testimony to importance that the public attach to knowing who their ancestors are.

In our study we ask: do the cultural values top managers inherit from their ancestors affect their decision-making today? The main challenge of studying culture is that it is easily confounded with economic and institutional factors that, much like culture, vary across countries. The key innovation of our study is that we focus on US-born CEOs who are the children or grandchildren of immigrants. For ease of reference, we call these CEOs Gen2-3 CEOs. The key point is that, while Gen2-3 CEOs are exposed to the same legal, social and institutional influences as other US-born CEOs, they possess a distinct cultural heritage. Specifically, the cultural preferences and beliefs of Gen2-3 CEOs are likely to bear the cultural mark of the countries from which their parents or grandparents have emigrated.

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