Monthly Archives: March 2019

Keynote Remarks at the ICI Mutual Funds and Investment Management Conference

Posted by Elad L. Roisman, U.S. Securities and Exchange Commission, on
Tuesday, March 19, 2019
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Elad L. Roisman is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on Commissioner Roisman’s recent remarks at the ICI Mutual Funds and Investment Management Conference, available here. The views expressed in the post are those of Mr. Roisman and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

I. Introduction

Thank you, Susan [Olson], for the kind introduction. I am excited to join you here and deliver my first formal speech as a Commissioner. It has been a little over six months since I started in my new role at the Securities and Exchange Commission (“SEC”), and I can still say that it’s a very surreal feeling. Not a day goes by when I do not think about how incredible an honor it is to serve the investing public. My path to this job has not been linear. But my experiences along the way—working in private practice as an attorney, at the parent public company of a large stock exchange, in the role of counsel to an SEC Commissioner, and on the staff of the Banking Committee in the U.S. Senate—have given me a broad view of the markets that the SEC regulates and a deep commitment to the agency’s mission. I mean this, truly: it is a privilege to be serving in my role.

Today, I will talk about the proxy process. But, before I segue into any substance, this is a good time for me to provide my first standard disclaimer: My views and remarks are my own, and do not necessarily represent those of the SEC or other Commissioners.

Last year, Chairman Jay Clayton announced that the Commission would review the existing SEC rules that govern the proxy system. [1] The staff held a roundtable that raised many issues in this area and invited public comment prior to and following the event. [2] Recently, the Chairman asked me to take the lead on the Commission’s efforts to consider improvements to the proxy process. I gladly accepted and feel honored to have this opportunity. [3]

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Private Contracting, Law and Finance

Posted by Graeme Acheson (University of Stirling), Gareth Campbell (Queen's University Belfast), and John Turner (Queen's University Belfast), on
Tuesday, March 19, 2019
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Graeme Acheson is Professor at the University of Stirling; Gareth Campbell is Professor at Queen’s University Belfast; and John Turner is Professor at Queen’s University Belfast. This post is based on their recent article, forthcoming in the Review of Financial Studies. Related research from the Program on Corporate Governance includes The “Antidirector Rights Index” Revisited by Holger Spamann.

The Law and Finance hypothesis remains one of the most controversial theories in financial economics. In its original form, it argued that countries with higher legal protections for shareholders had wider share ownership dispersion and larger stock markets. The initial theory has been extended to consider not only protections against director self-dealing, but also the role that a myriad of other laws may have on financial outcomes. However, there has also been substantial criticism of this hypothesis. Much of the debate has focused almost exclusively on recent data. This is surprising, given that law has evolved over such a long period of time, and the emphasis placed on legal origins. There has been little systematic study looking at when and how company law originated, nor at how it evolved to create the modern system.

In our article titled Private Contracting, Law and Finance, we take the Law and Finance hypothesis back to its origins, by conducting an extensive analysis of shareholder protections in Victorian Britain. Instead of looking at the protections afforded by statutory corporate law, we examine the protections provided to shareholders by nearly 500 companies in their charters or articles of association. We argue that the experience of Victorian Britain was, in some respects, largely consistent with the Law and Finance hypothesis. Shareholders did enjoy substantial rights, there were highly developed capital markets, and there was wide dispersion of ownership.

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Dual-Track Processes: How to Turbocharge Your Exit

Posted by Michal Berkner, Josh Kaufman, and James Foster, Cooley LLP, on
Tuesday, March 19, 2019
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Michal Berkner and Josh Kaufman partners and James Foster is an associate at Cooley LLP. This post is based on their Cooley memorandum. Related research from the Program on Corporate Governance includes M&A Contracts: Purposes, Types, Regulation, and Patterns of Practice, and Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here) both by John C. Coates, IV.

Exiting an investment is an inherently uncertain process. Even for a thriving business with a viable equity story, committed stakeholders and the right advisers, the final deal terms and valuation are typically guided by factors beyond a company’s control. These include prevailing market sentiment, current appetite for acquisitions in a particular sector and the political and economic environment, all of which can change well within a given transaction timetable. In the face of a global economic slowdown, ongoing trade wars, Brexit, heightened market volatility and other sources of uncertainty, it is becoming increasingly important to consider how deals can be run to maximize transaction certainty and achieve optimal valuation.

Pursuing a “dual-track” process involves preparing for an initial public offering at the same time as running a private M&A process, often through an auction. Relative to choosing a single exit strategy, a dual-track process tends to be more complicated and resource-intensive, while also posing some specific risks. However, if the right dynamic is created, a dual-track process can provide visibility of relative valuation and the benefit of optionality, maximizing the chance of securing the most favorable terms. Whether there’s a looming threat of a government shutdown or a sudden stock market sell-off, or the auction bids come in below expectations, the alternative track may present a superior exit option. A dual-track process reduces the possibility that the vagaries of the stock market and industry-specific dynamics will have a detrimental effect on the overall exit by opening the investment opportunity to public markets as well as financial and strategic investors, with each influenced by the others.

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The Short-Termism Thesis: Dogma vs. Reality

Posted by Charles Nathan and Kal Goldberg, Finsbury LLC, on
Monday, March 18, 2019
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Charles Nathan is Senior Advisor and Kal Goldberg is Partner at Finsbury LLC. This post is based on their Finsbury memorandum. Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law by Leo E. Strine (discussed on the Forum here); Short-Termism and Capital Flows by Jesse Fried and Charles C. Y. Wang (discussed on the Forum here); and Stock Market Short-Termism’s Impact by Mark Roe (discussed on the Forum here).

The belief that short-termism (aka quarterly capitalism) in our capital markets and in the management of our public companies is seriously (many would say fatally) damaging our economy is so widely accepted it has become a veritable truism. Countless directors and CEOs, prominent institutional investors, leading business associations, renowned lawyers and judges, prestigious academics and think tanks and politicians of all ilk (including in at least one tweet, President Trump) regularly and passionately denounce short-termism and blame it for a myriad of actual and supposed short comings of our free market economy. In short, short-termism has achieved the sanctity of dogma—a belief system that is beyond doubt and beyond question.

One of the challenges of the short-termism thesis is identifying what it encompasses. Most versions of short-termism begin with a view that it is the result of investors’ increasingly frantic trading patterns and demands for immediate profits, measured on a quarterly basis. But the asserted consequences of short-termism—that is to say, the problems it creates that need solution—are not as uniform as the perceived cause.

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Where’s the Greenium?

Posted by David F. Larcker (Stanford University) and Edward M. Watts (Stanford University), on
Monday, March 18, 2019
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David F. Larcker is James Irvin Miller Professor of Accounting at Stanford Graduate School of Business and Edward Watts is a Ph.D. student at Stanford Graduate School of Business. This post is based on their recent paper.

Environmental, Social, and Governance (ESG) measurement, Corporate Social Responsibility (CSR) activities, and Socially Responsible Investing (SRI) are increasingly important research topics in both academic and professional areas. A question of primary importance in this area is whether ESG investments have value to investors beyond the normal expected risk and return attributes of a security. For instance, if investors are presented with a high-ESG and low-ESG security whose risk and returns are identical, would investors pay more for the high-ESG security?

In our study, we focus on U.S. municipal issuers as it provides a novel quasi-natural experiment in which to investigate this issue. Municipal issuers have been one of the largest issuers of “Green bonds.” From 2013 to 2017, over $23 billion of self-labeled Green bonds have been issued in municipal markets, for more than 2,500 individual securities. This provides an extensive sample of securities and issuers for our empirical tests.

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Updated Nasdaq Requirements for Direct Listings

Posted by Catherine M. Clarkin, Robert W. Downes, and James M. Shea Jr., on
Monday, March 18, 2019
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Catherine M. Clarkin and Robert W. Downes are partners and James Shea, Jr. is special counsel at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Ms. Clarkin, Mr. Downes, Mr. Shea, and Ekaterina Roze.

On February 14, 2019, the Nasdaq Stock Market LLC filed notice with the Securities and Exchange Commission of a rule change to “amend and clarify certain aspects of the listing process for Direct Listings.” [1] The rule, which became effective upon filing, clarifies the conditions under which private companies can list on Nasdaq through a direct listing, rather than by raising new capital through a traditional initial public offering, and is substantially similar to the direct listing rule adopted by the New York Stock Exchange in February 2018. [2] Like the NYSE rule, the Nasdaq rule covers companies applying to list their securities on Nasdaq upon effectiveness of a registration statement under the Securities Act of 1933 registering only the resale of securities sold in earlier private placements, and provides guidance on how Nasdaq calculates compliance with its initial listing standards for direct listings, including with respect to companies listing securities that do not have an established private placement market. The SEC is soliciting comments on the rule through March 15, 2019. [3]

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Is it Time for Corporate Political Spending Disclosure?

Posted by Cydney Posner, Cooley LLP, on
Sunday, March 17, 2019
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Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner. Related research from the Program on Corporate Governance includes Shining Light on Corporate Political Spending by Lucian Bebchuk and Robert J. Jackson Jr., (discussed on the Forum here); The Untenable Case for Keeping Investors in the Dark by Lucian Bebchuk, Robert J. Jackson Jr., James David Nelson, and Roberto Tallarita (discussed on the Forum here); Fiduciary Blind Spot: The Failure of Institutional Investors to Prevent the Illegitimate Use of Working Americans’ Savings for Corporate Political Spending by Leo E. Strine, Jr. (discussed on the Forum here); and Conservative Collision Course?: The Tension between Conservative Corporate Law Theory and Citizens United by Leo E. Strine Jr. and Nicholas Walter (discussed on the Forum here).

A new bill that has been introduced in the House, H.R. 1053, would direct the SEC to issue regs to require public companies to disclose political expenditures in their annual reports and on their websites. While the bill’s chances for passage in the House are reasonably good, that is not the case in the Senate. In the absence of legislation, some proponents of political spending disclosure have turned instead to private ordering, often through shareholder proposals. So far, those proposals have rarely won the day, perhaps in large part because of the absence of support from large institutional investors. But that notable absence has recently come in for criticism from an influential jurist, Delaware Chief Justice Leo Strine. Will it make a difference?
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Applying a Principles-Based Approach to Disclosing Complex, Uncertain and Evolving Risks

Posted by William H. Hinman, U.S. Securities and Exchange Commission, on
Saturday, March 16, 2019
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William H. Hinman is Director of the Division of Corporation Finance at the U.S. Securities and Exchange Commission. This post is based on his recent remarks at the 18th Annual Institute on Securities Regulation in Europe, available here. The views expressed in this post are those of Mr. Hinman and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Good morning. Thank you, John [White] for that kind introduction and to the Practicing Law Institute and Allen & Overy for hosting this event. I am pleased to be here with you today. [1]

Today [March 15, 2019] I would like to discuss how the U.S. securities disclosure requirements, which are largely principles-based, apply in areas where the disclosure topics may be complex, associated with uncertain risks and rapidly evolving. Sounds like Brexit might fit that description, and I don’t think I could come to London this week without spending some time discussing it. I realize that you all may be worn out on the subject, and the U.S. regulatory perspective on this topic may seem of secondary or tertiary interest to those of you living through these events. However, I would note that over half of the world’s largest companies [2] have their primary listing in the U.S. and a larger proportion trade and report in compliance with our requirements. Given that these companies typically have extensive international operations, including in the U.K. and EU, we have a keen interest in the quality of disclosure that is being provided by the many issuers for which Brexit may have a material impact.

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A Reminder About Corporate Crisis Communications

Posted by John F. Savarese, David A. Katz, and Wayne M. Carlin, Wachtell, Lipton, Rosen & Katz, on
Saturday, March 16, 2019
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John F. Savarese, David A. Katz, and Wayne M. Carlin are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Savarese, Mr. Katz, Mr. Carlin, David B. Anders, and Marshall L. Miller.

In a case that should serve as a cautionary tale for all public companies responding to a public relations crisis, the DOJ and SEC today announced securities fraud settlements with Lumber Liquidators Holdings, Inc., alleging that the company had made false and misleading statements in response to a damaging report about the company’s products aired on the “60 Minutes” television program. The company entered into a Deferred Prosecution Agreement (“DPA”) with the DOJ, which included an agreed statement of facts, as well as a cease-and-desist order with the SEC. Lumber Liquidators will pay a total of $33 million in criminal fines, forfeiture and disgorgement.

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Do Firms Respond to Gender Pay Gap Transparency?

Posted by Margarita Tsoutsoura (Cornell University), on
Friday, March 15, 2019
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Margarita Tsoutsoura is the John and Dyan Smith Professor of Management and Family Business at the Cornell University SC Johnson College of Business. This post is based on a recent paper by Professor Tsoutsoura; Morten Bennedsen, the André and Rosalie Hoffmann Chaired Professor of Family Enterprise at INSEAD; Elena Simintzi, Assistant Professor of Finance at the University of North Carolina Kenan-Flagler Business School; and Daniel Wolfenzon, the Stefan H. Robock Professor of Finance and Economics at Columbia Business School. This post is based on their recent paper.

Gender pay disparities characterize labor markets in most developed countries. When a man earns 100 dollars, a woman earns 77 in the United States, 78.5 dollars in Germany, 79 dollars in the United Kingdom, and 83.8 on average across European Union countries according to Eurostat.

Recent proposals across many countries focus on pay transparency to promote equal pay. Government-mandated reporting of gender pay discrepancies has been a subject of much debate: Governments often propose transparency as a tool to encourage firms to reduce the wage gap between men and women. Unions and employee groups representing women also seem to believe that secrecy on pay contributes significantly to unequal pay for women. Opponents of pay transparency argue that disclosing gender pay comes as a challenge to firms as it lacks practical utility, increases administrative burden, and violates employee privacy. Until recently there has been no systematic evidence to support either side.

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