Monthly Archives: February 2018

Securities Law in the Sixties: The Supreme Court, the Second Circuit, and the Triumph of Purpose Over Text

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.

Key pillars of modern securities law—insider trading regulation, implied private rights of action, and “federal corporation law”—were born in the 1960s, not as a result of legislative enactment, but rather, judicial pronouncement. In our paper, Securities Law in the Sixties: The Supreme Court, the Second Circuit, and the Triumph of Purpose over Text, we show how the judicial approach to securities law transformed in that decade. In our paper we focus on the key Supreme Court cases of the period, looking not only at the published opinions, but also at the papers of each of the justices. This archival research shows the exchange of ideas among the justice and how the opinions evolved in the drafting. The Supreme Court of the Sixties did not simply apply the text as enacted as a mere agent of Congress, but instead made itself a partner of Congress in shaping the securities laws. Under this approach, the purpose of the securities laws became the touchstone of interpretation. The interpretive space opened by the invocation of purpose allowed a dramatic expansion in the law of securities fraud.


Looking Beyond Sustainability Disclosure

Linda-Eling Lee is Global Head of ESG Research at MSCI, and Matt Moscardi is Head of Financial Sector Research for MSCI ESG Research. This post is based on an MSCI publication by Ms. Lee and Mr. Moscardi.

For years, a growing number of institutional investors have pressured companies to disclose more of their ESG practices. Companies are responding, but voluntary disclosure has its limits in providing a full picture of companies’ ESG risks. In 2018, we anticipate that the disclosure movement reaches a tipping point, as investors seek broader data sources that can balance the corporate narrative and yield better signals for understanding the ESG risk landscape actually faced by portfolio companies.

Companies historically have been caught between investor demands for transparency and a desire to control their corporate narrative. On one side, investors have supported numerous efforts to encourage company disclosure. [1] They have enlisted regulators to compel disclosure on select topics or metrics and influenced exchanges to require more disclosure on sustainability as part of their listing requirements. [2] On the other side, some companies may carefully manage disclosures through a painstaking editing and brand-polishing process [3] while protecting proprietary information.


An Overview of U.S. Shareholder Proposal Filings

Subodh Mishra is Executive Director at Institutional Shareholder Services, Inc. This post is based on an ISS Analytics publication by Kosmas Papadopoulos, Managing Editor at ISS Analytics.

The 2018 U.S. proxy season is around the corner, and an early overview of shareholder proposal filings may give us a first taste of what is in store for investors and companies in terms of hot-button issues and overall market dynamics. Based on our analysis of shareholder proposal filings available in ISS’ shareholder filings database, we identified 450 proposals filed at Russell 3000 companies, of which 334 are still pending, while the rest have already made on ballots or were omitted and withdrawn.

Environmental and social issues dominate the agenda

This year promises to continue the recent trend of social and environmental issues overshadowing governance- and compensation-related proposals. More than two-thirds of filed proposals are related to social or environmental issues, with political spending and actions, board and workplace diversity and parity and climate and sustainability being the key themes.


Mandatory Arbitration: An Illusory Remedy for Public Company Shareholders

Rick A. Fleming is an Investor Advocate with the U.S. Securities and Exchange Commission. This post is based on Mr. Fleming’s recent remarks at the Practising Law Institute. The views expressed in this post are those of Mr. Fleming and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Today [February 24, 2018] is a special day for the Office of the Investor Advocate. I started this job four years ago today, and because I am the first Investor Advocate that is also the day the Office of the Investor Advocate came into existence. During the past four years, through the efforts of the talented and dedicated individuals who have joined my Office and work so hard to advocate for investors, we have helped to elevate the Commission’s thinking about the needs of today’s investors. And we continue to make progress in some important areas. For example, the SEC Ombudsman, Tracey McNeil, has recently launched an electronic Ombudsman Matter Management System (OMMS) to make it easier for investors to let us know of any concerns about the SEC or a self-regulatory organization. An electronic OMMS form is available at the Ombudsman’s website,, and we encourage investors to check it out.

This morning, I would like to share some of my views on the issue of mandatory arbitration and, more specifically, on efforts to force public company shareholders to forego class action lawsuits and seek recovery individually through arbitration. This has been a matter of concern to investors recently, [1] after commentators have suggested that U.S. IPO issuers should consider including arbitration provisions in their articles or bylaws. [2]


Keeping Shareholders on the Beat: A Call for a Considered Conversation About Mandatory Arbitration

Robert J. Jackson, Jr. is Commissioner at the U.S. Securities and Exchange Commission. This post is based on his recent remarks at the CEO Investor Forum, available here. The views expressed in the post are those of Commissioner Jackson and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff

Thank you so much, Gianna [McCarthy], for that very kind introduction. I’m so glad to be back home here in New York. It’s an incredible honor to be speaking after Mayor Bloomberg today [Feb. 26, 2018]. And I’m sure the Mayor will be pleased to know that I plan to return and speak in New York often, if only so I can get a decent slice of pizza. [1]

I was born in the Bronx, just a few subway stops from here, to a big Irish Catholic family. My father was one of five kids and my mother was one of nine, and I’ve got dozens of cousins spread all around New York. In fact, it would be great if you could keep the news that I’m in town just among us. Otherwise, I’m going to have to spend the rest of the week visiting everyone.


Turning Words into Action

Bruce F. Freed is president of the Center for Political Accountability; Karl J. Sandstrom is a former Federal Election Commissioner and practices law at Perkins Coie LLP. This post is based on a CPA publication by Mr. Freed and Mr. Sandstrom. Related research from the Program on Corporate Governance includes Shining Light on Corporate Political Spending and Corporate Political Speech: Who Decides?, both by Lucian Bebchuk and Robert Jackson (discussed on the Forum here and here), and Corporate Politics, Governance, and Value Before and after Citizens United by John C. Coates.

BlackRock CEO Larry Fink’s recent annual letter to corporate leaders (discussed on the Forum here) correctly urges companies to contribute to society. At a time when the private sector is being pressed to address major societal issues, his call is especially important. There’s a glaring omission, however: A business cannot begin to evaluate its social impact and business risk if it doesn’t openly and forthrightly address its spending to influence political elections, and the consequences of that spending.


The Perils of Small-Minority Controllers

Lucian Bebchuk is James Barr Ames Professor of Law, Economics and Finance, and Director of the Corporate Governance Program, at Harvard Law School. Kobi Kastiel is Research Director of the Program’s Project on Controlling Shareholders and Assistant Professor at Tel-Aviv University Faculty of Law. This post is based on their recent study, available here.

Dropbox filed IPO documents last week, and our analysis of these documents reveals considerable risk that the company’s co-founders would hold lifetime control even if they would retain only a tiny minority of the company’s equity capital. In a study that we just placed on SSRN, The Perils of Small-Minority Controllers, we seek to place a spotlight on a significant set of dual-class companies whose structures raise especially severe governance concerns: those with controllers holding a small minority of the company’s equity capital.

We analyze the perils of small-minority controllers, explaining how they generate considerable governance costs and risks and showing how these costs can be expected to escalate as the controller’s stake decreases. We also identify the mechanisms that enable such controllers to retain their power despite holding a small or even a tiny minority of the company’s equity capital. Based on a hand-collected analysis of governance documents of these companies, we present novel empirical evidence on the current incidence and potential growth of small-minority and tiny-minority controllers. Among other things, we show that governance arrangements at a substantial majority of dual-class companies enable the controller to reduce his equity stake to below 10% and still retain a lock on control, and a sizable fraction of such companies enable retaining control with less than a 5% stake.

Finally, we examine the considerable policy implications that arise from recognizing the perils of small-minority controllers. We first discuss disclosures necessary to make transparent to investors the extent to which arrangements enable controllers to reduce their stake without forgoing control. We then identify and examine measures that public officials or institutional investors could take to ensure that controllers maintain a minimum fraction of equity capital; to provide public investors with extra protections in the presence of small-minority controllers; or to screen midstream changes that can introduce or increase the costs of small-minority controllers.

Below we provide a more detailed account of our analysis:


The Place of the Trans Union Case in the Development of Delaware Corporate Law

Robert T. Miller is a Professor of Law and the F. Arnold Daum Fellow in Corporate Law at the University of Iowa College of Law, as well as a Fellow and Program Affiliated Scholar at the Classical Liberal Institute at the New York University School of Law. This post is based on his recent article, published in the William & Mary Business Law Review, and is part of the Delaware law series; links to other posts in the series are available here.

Although it is dangerous to attempt to say anything new about Smith v. Van Gorkom, this article tries to do so in two distinct ways. First, I provide a more comprehensive account of the facts of the case than that recounted by the Delaware Supreme Court. For example, virtually unmentioned in the vast scholarly commentary on the case are the following facts:


Banks and Labor as Stakeholders: Impact on Economic Performance

Stijn Claessens is Head of Financial Stability Policy at the Bank for International Settlements (BIS) and Professor of International Finance Policy at the University of Amsterdam; Kenichi Ueda is associate professor of economics at the University of Tokyo. This post is based on their recent paper. The views expressed are those of the authors and do not necessarily represent those of the Bank for International Settlements.

Corporate governance is in essence about how various stakeholders exert their influences over firms. In the U.S., corporate governance is currently often characterized as a combination of strong managers, relatively strong creditors, weak owners, and relatively weak workers; in continental Europe, in contrast, it is described as a combination of weak managers, relatively strong creditors and owners, and strong workers (Roe, 1994, Gelter, 2009). Historically, however, the relative powers of stakeholders in the U.S. differed, especially those of creditors and workers. Before the 1970s, banks were stronger while workers were weaker. Between the early-1970s and the mid-1990s, as the US banking sector was deregulated, banks lost some of their monopolistic powers. Over the same period, US workers gained more statuary protections (albeit still basic compared to many European countries).


SEC Enforcement Priorities in the Trump Era

Brian Breheny and Colleen P. Mahoney are partners and John C. Hamlett is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden publication by Mr. Breheny, Ms. Mahoney, and Mr. Hamlett.

The actions that Securities and Exchange Commission (SEC) Chairman Jay Clayton has taken since the start of his tenure in May 2017 provide an indication of SEC priorities, including encouraging initial public offerings (IPOs) and combating abuses in cybersecurity matters. These and other priorities will have a significant impact on the SEC’s regulation and enforcement agendas in 2018.

Initial Steps

A key focus for Chairman Clayton has been filling the top leadership positions at the SEC. He has selected new directors for each of the SEC’s major divisions—Corporation Finance, Investment Management, and Trading and Markets—and in the case of the Division of Enforcement, a new co-director. When naming these individuals, Chairman Clayton cited their shared characteristics, including that they are senior professionals with long-standing industry experience, as reasons why this group has the skills to deliver on his goal of re-evaluating the SEC’s rules and practice. Additionally, with the December 2017 Senate confirmation of President Trump’s commissioner nominees—former congressional aide Hester Peirce (Republican) and New York University School of Law professor Robert Jackson Jr. (Democrat)—the SEC is operating with all five commissioners for the first time since late 2015.


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