Yearly Archives: 2018

Stock Buyouts and Corporate Cashouts

Posted by Robert J. Jackson, Jr., U.S. Securities and Exchange Commission, on
Wednesday, June 13, 2018
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Robert J. Jackson, Jr. is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on Commissioner Jackson’s recent public statement, 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.

Related Program research includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here); The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008 by Lucian Bebchuk, Alma Cohen, and Holger Spamann (discussed on the Forum here); Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here); and Short-Termism and Shareholder Payouts: Getting Corporate Capital Flows Right by Jesse Fried and Charles Wang (discussed on the Forum here).

Thank you so much, Neera, for that very kind introduction. I’ve long admired all that you and everyone here at the Center for American Progress do to promote a progressive economic agenda. And I share your commitment to making sure our markets are safe and efficient—and fair for all Americans. So it’s a real honor to be with you here today. [1]

I also want to thank my friend Andy Green, who in addition to being Managing Director of Economic Policy here at CAP, has been a critical source of wisdom for me since my swearing in at the Commission back in January.

Today [June 11, 2018], I’d like to share a few thoughts about corporate stock buybacks—and some research produced by my staff that raises significant new questions about this activity. As Neera mentioned, I’m a recovering researcher. Before I was appointed to the SEC, I was a law professor who spent most of my time thinking about how to give corporate managers incentives to create sustainable long-term value. I’d often ask my students: are we making sure that executive pay gives managers reason to invest in the long-term development of their workforce and their communities? Or are we paying executives to pursue short-term stock-price spikes rather than long-term growth?

Little did I know that, so soon into my tenure, I’d have a sobering case study to put these questions to the test. That’s because the Trump tax bill, promising to bring overseas corporate cash home, became law last December.
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Rolling Back the Dodd-Frank Reforms

Posted by Mark V. Nuccio and Richard Loewy, Ropes & Gray LLP, on
Wednesday, June 13, 2018
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Mark V. Nuccio is partner and Richard Loewy is counsel at Ropes & Gray LLP. This post is based on a Ropes & Gray publication by Mr. Nuccio, Mr. Loewy, and Gideon Blatt.

On May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”), marking the first set of much anticipated roll-backs of the Dodd-Frank Act of 2010. Although heralded in the media as a dramatic step away from regulatory reforms introduced by Dodd-Frank, the changes included in the Act will generally have the greatest impact on small banks. However, in the coming weeks, financial regulators are expected to unveil proposed revisions to the Volcker Rule regulations that are expected to have a more significant impact on large banking institutions.

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Index Fund Stewardship

Posted by Lucian Bebchuk, Alma Cohen, and Scott Hirst (Harvard Law School), on
Tuesday, June 12, 2018
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Lucian Bebchuk, Alma Cohen, and Scott Hirst teach at Harvard Law School and are affiliated with its corporate governance program. This post is based on their article, The Agency Problems of Institutional Investors.

In an article published in the American Economic Association’s Journal of Economic Perspectives, The Agency Problems of Institutional Investors (Bebchuk, Cohen and Hirst (2017) or “BCH”), we put forward and applied an analytical framework for understanding the monitoring and engagement decisions made by index funds. (Our article also extend the framework to actively managed funds). In light of the current policy discussions regarding the rise of index investing, this post discusses some of the implications of our article’s results and conclusions for this discussion.

A significant body of recent work has expressed serious concerns that the rise of indexing leads to increase in “common ownership” that produces anti-competitive effects (e.g., Azar, Schmalz & Tecu (2018), Elhauge (2016); Posner, Scott Morton & Weyl (2017)). These writers worry that index funds, which have substantial ownership in many companies that operate in a given industry, can induce corporate managers to act in a more anti-competitive fashion than they would do without such institutional owners. We show that this line of work fails to take into account the incentives of index fund managers that we analyze. As a result, it makes implausible assumptions regarding the extent to which index fund managers influence the business decisions of their portfolio companies. Our incentive analysis should temper the concerns of index-fund-alarmists.

At the same time, our incentive analysis should also temper the enthusiasm of those who expect large governance benefits to flow from the rise of index investment. On the view of index-fund-enthusiasts, because index funds do not have the option of exit, they have a strong incentive to improve governance and thereby improve value, and their substantial stakes in companies enable them to do so. Indeed, the leaders of the largest index fund managers have made public announcements stressing their commitment to stewardship and improving corporate governance, and these fund managers have been expanding the number of staff that are dedicated to voting and engagement.

Such governance commitments by index fund managers are encouraging, and we recognize that well-meaning index fund managers may make stewardship decisions that are superior to those predicted by an incentive calculus. However, a key premise in the fields of corporate governance and financial economics is that incentives matter. Our analysis sheds light on the structural incentive problems that impede the ability of index funds to produce governance benefits.

To give readers a sense of these problems we discuss below two structural factors that sharply limit the benefits to index fund managers from bringing about value-enhancing changes. (Among other things, our article also analyzed private costs that index fund managers bear that discourage them from seeking governance changes that the managers of portfolio companies resist; see BCH, pp. 101-104.) Our discussion below proceeds in three steps:

  • We first identify an analytical benchmark, the actions that would be optimal from the perspective of the beneficial investors in index funds;
  • We then analyze how the tiny fraction of governance-generated gains captured by index fund managers provides incentives to under-invest significantly compared to this benchmark; and
  • Finally, we analyze how the competition for investment assets among rival index fund managers provides no incentives to seek value gains.

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Legislative Threat to Shareholder Rights

Posted by Dimitri T.G. Zagoroff, Glass, Lewis & Co., on
Tuesday, June 12, 2018
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Dimitri T.G. Zagoroff is Content Manager and Internal Consultant at Glass, Lewis & Co. This post is based on his Glass Lewis memorandum.

Shareholder rights are once again under legislative threat.

Introduced May 10, HR 5756 would require the SEC to adjust resubmission thresholds for shareholder proposals. The language mirrors that of the Financial CHOICE Act in calling for substantial increases to the level of support required for proposals to stay on the ballot: the threshold for first-year submissions would double from 3% to 6% support; more than double from 6% to 15% for second-year, and treble from 10% to 30% in the third-year.

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Implementation of MFW Standard in New York

Posted by David Berger, Amy Simmerman, and Nate Emeritz, Wilson Sonsini Goodrich & Rosati, on
Tuesday, June 12, 2018
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David Berger and Amy Simmerman are partners and Nate Emeritz is Of Counsel at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR publication by Mr. Berger, Ms. Simmerman, and Mr. Emeritz, and is part of the Delaware law series; links to other posts in the series are available here.

In another significant M&A decision from the New York Supreme Court, the controlling stockholder of a Delaware corporation failed to obtain judicial deference under the so-called “MFW” framework for its merger with the corporation. The MFW framework allows a controlling stockholder transaction that would otherwise be subject to the difficult entire fairness standard of judicial review in litigation to regain the protection of the deferential business judgment rule if the transaction is properly subjected to approval by an independent committee of the board of directors and the company’s minority stockholders. [1]

This new case, In re Handy & Harman Ltd. Stockholder Litigation, [2] was decided by the same judge who recently enjoined Fujifilm’s acquisition of Xerox [3] and is important reading in the context of deals that might benefit from use of the MFW framework and for related litigation over Delaware corporations outside of the Delaware Court of Chancery. The case also reflects the ongoing stream of corporate litigation occurring outside of Delaware.

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Cost of Experimentation and the Evolution of Venture Capital

Posted by Michael Ewens (California Institute of Technology), Ramana Nanda (Harvard Business School), Matthew Rhodes-Kropf (MIT Sloan School of Management), on
Monday, June 11, 2018
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Michael Ewens is Associate Professor of Finance and Entrepreneurship at the California Institute of Technology; Ramana Nanda is the Sarofim-Rock Professor of Business Administration at Harvard Business School; and Matthew Rhodes-Kropf is Visiting Associate Professor of Finance at the MIT Sloan School of Management. This post is based on their recent article, forthcoming in the Journal of Financial Economics.

Related research from the Program on Corporate Governance includes Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups, by Jesse Fried and Brian Broughman (discussed on the Forum here), and Agency Costs of Venture Capitalist Control in Startups by Jesse Fried and Mira Ganor.

The introduction of cloud computing services in the mid 2000s was a fundamental technological shift that has also had an impact on the financing landscape for Internet and web-based startups. A key benefit of cloud computing for such startups is the ability to “rent” hardware space in small increments and scale up as demand grows, instead of making large upfront investments when the outcome of the venture is still uncertain. Entrepreneurs and investors can therefore learn about the viability of startups with substantially less funding, lowering the cost of financing initial “experiments” that can help investors learn about the potential of new ventures before committing further capital.

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Governance of the 25 Largest European Banks a Decade After the Crisis

Posted by Lisa Andersson, Aktis; and Stilpon Nestor, Nestor Advisors, on
Monday, June 11, 2018
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Lisa Andersson is Head of Research of Aktis and Stilpon Nestor is Managing Director and Senior Advisor at Nestor Advisors. This post is based on their recent Nestor Advisors/Aktis publication.

This summer marked the 10-year anniversary of the start of the global financial crisis. Over the 18 months following August 2007, several bank collapses in the United States, Germany and Britain, culminating with the demise of Lehman Brothers in September 2008 shook the financial system to its core. The interconnectivity of the world’s financial system meant that the repercussions would be felt globally, and on a monumental scale. The US Department of the Treasury has estimated that total household wealth would lose some $19.2 trillion following a publicly-funded government bailout program. Over the last decade governments, regulators, banks and their investors have revamped the financial system and its supervision in order to recover the public subsidy and prevent a similar crash from happening again.

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Standing Up for the Retail Investor

Posted by George David Banks and Bernard Sharfman, Main Street Investors Coalition, on
Sunday, June 10, 2018
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George David Banks is Executive Director of Main Street Investors Coalition and Professor Bernard Sharfman is Chairman of the Advisory Council.

Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst; Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here); and In Search of Absentee Shareholders by Kobi Kastiel and Yaron Nili (discussed on the Forum here).

A new shareholder advocacy group has been formed, the Main Street Investors Coalition. The Coalition aims to mitigate the adverse effects created by the concentration of shareholder voting power that now resides in the hands of mutual fund advisors. This concentration has developed because of the growing popularity of index mutual funds and the industry practice of delegating shareholder voting rights to their advisors.

Shareholder voting, when it is done with the intent of maximizing the wealth of all shareholders, is an important component of efficient corporate governance. According to the Delaware Supreme Court, “[w]hat legitimizes the stockholder vote as a decision-making mechanism is the premise that stockholders with economic ownership are expressing their collective view as to whether a particular course of action serves the corporate goal of stockholder wealth maximization.”

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Five Key Points from the Financial Regulation Relief Law

Posted by Dan Ryan and Julien Courbe, PricewaterhouseCoopers LLP, on
Saturday, June 9, 2018
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Dan Ryan is Banking and Capital Markets Leader and Julien Courbe is Asset and Wealth Management Advisory Leader at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mr. Courbe, Mike Alix, Adam Gilbert, and Roberto Rodriguez.

[May 24], the President signed the Economic Growth, Regulatory Relief, and Consumer Protection Act, the first major financial services legislation since Dodd-Frank. The act received crucial bipartisan support in the Senate and passed the House on May 22nd to triumphant cheers from the banking industry.

It is not a major overhaul of Dodd-Frank, nor is it strictly a community bank law, as headlines alternatively suggest. In reality, it makes several meaningful technical changes—most notably by raising the threshold at which a bank is considered a systemically important financial institution (SIFI) from $50 billion to $250 billion—while keeping the main pillars of post-crisis regulation intact. Mid-size banks will be the biggest winners as they will now be able to make plans for growth, including acquisitions, without considering the added compliance costs that come with breaching the systemically important threshold. Smaller community and rural banks also will see plenty of benefits from this law, including relief from the Volcker rule and a number of mortgage and lending requirements.

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The Enforceability of Employment Arbitration Agreements

Posted by Robert Atkins, Liza Velazquez and Maria Keane, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on
Friday, June 8, 2018
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Robert Atkins and Liza Velazquez are partners and Maria Keane is counsel at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss publication by Mr. Atkins, Ms. Velazquez, Ms. Keane, David Brown, Jay Cohen and Daniel Toal. [1]

On May 21, 2018, the United States Supreme Court, in a long-awaited decision, held that employment arbitration agreements with class action waivers requiring individual arbitration are enforceable under the Federal Arbitration Act (the “FAA”), notwithstanding Section 7 of the National Labor Relations Act (the “NLRA”), which protects employees’ rights to engage in concerted activities. In so ruling, the Court’s 5-4 decision, issued in Epic Systems Corp. v. Lewis, which had been consolidated with two other cases, Ernst & Young, LLP v. Morris and NLRB v. Murphy Oil USA, Inc., resolved the different approaches federal courts had taken on this issue for years. Although the majority opinion acknowledged that the efficacy of class action waivers in arbitration agreements is, “[a]s a matter of policy[,]” debatable, it ruled that “as a matter of law the answer is clear”—federal courts must enforce arbitration agreements in accordance with their terms, including those that require individualized arbitration.

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