Securities Regulation

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Federal and state securities regulation is the personification of what conservatives refer to pejoratively as “big government.” Businesses can’t raise money unless they first get permission from the government and, in many states, that permission turns on a regulator’s determination of whether the offer is fair. The cost of compliance is a serious drag on capital formation, especially small business capital formation. Federal and state securities laws also generate a tremendous amount of plaintiff’s litigation, another conservative bugaboo.

We’ve seen conservative efforts at the federal level to limit securities regulation and litigation—for example, the Private Securities Litigation Reform Act and the JOBS Act. But, unless things are going on at the state level that I’m not aware of, there doesn’t seem to be a corresponding effort at the state level.

That’s surprising, because the Republicans have greater control at the state level than they do at the federal level. There are 31 Republican governors and the Republicans control both chambers of the state legislature in 30 states, plus Nebraska’s unicameral legislature. Republicans control both the governorship and the state legislature in 24 states.

Why hasn’t there been a push to change state securities regulation? Are Republicans satisfied with state regulation?

Having just taught a corporate governance seminar class on the proxy process (from a company’s perspective), proxy advisory services, and institutional voting, I have the upcoming proxy season on my mind.  There are a great collection of resources available for those interested for academic or practice-related reasons.  My students found many of these summaries to be a good distillation of the issues and introduction to the nuts and bolts of proxy access.  I have provided my list of resources below, in addition to a quick summary of the major governance issues likely to be on the table in 2016.

Major Governance Issues:

2016 Proxy Season Resources:

“[T]he effective date of a registration statement shall be the twentieth day after the filing thereof.” That statement, in section 8(a) of the Securities Act of 1933,  makes the process seem so reassuringly quick and simple. If I want to offer securities to the public, I file a registration statement with the SEC and, less than three weeks later, I’m ready to go. But, as every securities lawyer knows, it isn’t really that easy.

It can take months for the registration statement in an IPO to become effective. The statutory deadline is circumvented through the use of a delaying amendment, a statement in the registration statement that automatically extends the 20-day period until the SEC has finished its review. See Securities Act Rule 473, 17 C.F.R. § 230.473.

But wouldn’t it be so much more conducive to capital formation if there really was a hard 20-day deadline? I understand that the SEC doesn’t have the staff to complete a full review in that time frame, but it would force them to focus on the important disclosure issues rather than some of the trivialities one sees in the current comment letters.

I’d like to see someone test that automatic…

Bernard Sharfman, in his new article on SSRN, The Tension Between hedge Fund Activism and Corporate Law, argues that hedge fund activism for control of a publicly traded corporation is a positive corrective measure in corporate governance.  After asserting that hedge fund activism should be permitted, Sharfman, argues, controversially, that courts should depart from traditional deference to a corporate board’s decision making authority under the business judgment rule.  Alternatively, Sharfman urges courts to adopt a heightened standard of scrutiny when reviewing defensive board actions against hedge funds.

[Hedge Fund Activism] has a role to play as a corrective mechanism in corporate governance and it is up to the courts to find a way to make sure it continues to have a significant impact despite the courts’ inclination to yield to Board authority. In practice, this means that when the plaintiff is an activist hedge fund and the standard of review is the Unocal test because issues of control are present, a less permissive approach needs to be applied, requiring the courts to exercise restraint in interpreting the actions of activist hedge funds as an attempt to gain control. 

If there are no issues of control, then Board independence and reasonable investigation still needs to be the focus. That is, before the business

…

For the past four weeks I have been experimenting with a new class called Transnational Business and Human Rights. My students include law students, graduate students, journalists, and accountants. Only half have taken a business class and the other half have never taken a human rights class. This is a challenge, albeit, a fun one. During our first week, we discussed CSR, starting off with Milton Friedman. We then used a business school case study from Copenhagen and the students acted as the public relations executive for a Danish company that learned that its medical product was being used in the death penalty cocktail in the United States. This required students to consider the company’s corporate responsibility profile and commitments and provide advice to the CEO based on a number of factors that many hadn’t considered- the role of investors, consumer reactions, the pressure from NGOs, and the potential effect on the stock price for the Danish company based on its decisions. During the first three weeks the students have focused on the corporate perspective learning the language of the supply chain and enterprise risk management world.

This week they are playing the role of the state and critiquing and…

As many of you know, I teach both traditional doctrinal and experiential learning courses in business law.  I bring experiential learning to the doctrinal courses, and I bring doctrine to the experiential learning courses.  I see the difference between doctrinal and experiential learning courses as a matter of emphasis.  Among other things, this post explores the intersection between traditional classroom-based law teaching and experiential law teaching by analogizing business law drafting to yoga practice principles.  This turned out to be harder than it “felt” when I first started to write it.  So, the post may be wholly or partially unsuccessful.  But I persevere . . . .

I begin by noting that we are, to some extent, in the midst of a critical juncture with respect to experiential learning in legal education.  Some observers, including both legal practitioners and faculty, criticize the lack of experiential learning, noting that legal education is too theoretical and policy-oriented, resulting in the graduation of students who are ill-prepared for legal practice.  Yet, other commentators note that too great an emphasis on experiential learning leaves students without the skills in theory and policy that they need to make useful interpretive judgments and novel arguments for their clients and to participate meaningfully in law reform efforts.  Of course, different law schools have different programs of legal education (something not noted well enough, or at all, in many treatments of legal education).  But even without taking that into account, many in and outside legal education (including, for example, in articles here and here) advise a law school curriculum that merges the two.  I think about and struggle with constructively effectuating this all merger the time.

Now, about the yoga . . . .  Most of you likely do not know that, in addition to teaching law, being a wife and mom, and other stuff, I enjoy an active yoga practice.  As I finished a yoga class on Sunday afternoon, I realized that yoga has something to say about integrating doctrinal and experiential learning, especially when it comes to instruction on legal drafting in the business law area.  Set forth below are the parallels that I observe between yoga and business law drafting.  They are not perfect analogs, but they are, in my view, instructive in a number of ways important to the teaching mission in business law.  The first two bullet points are, as I see it, especially important as expressions of the idea that law teaching is more complete and valuable when it holistically integrates doctrine, policy, theory, and skills.  The rest of the bullets principally offer other insights.

I was going to blog today about Usha Rodrigues’s article on section 12(g) of the Exchange Act, but my co-blogger Ann Lipton stole my thunder over the weekend. If you’re interested in securities law and you haven’t read Ann’s excellent post on section 12(g), you should. Ann discusses Usha Rodrigues’s article on the history and policy of section 12(g); if you haven’t read it, I strongly recommend it. It’s available here. (Even if you’re not interested in reading about section 12(g), I highly recommend Usha’s scholarship in general. I’ve read several of her articles and blog posts over the last few years; she has become one of the leading commentators on securities and corporate law. She blogs at The Conglomerate.)

Instead of discussing section 12(g), I’m going to talk about exams. I finished grading my fall exams about a month ago and I’ve had time to reflect on them. The main reason students don’t do well on exams is that they don’t know or understand the material. But I’ve been reflecting on the difference between exams that are pretty good and exams that are excellent. Those students all know the material, so that’s not the…

Assume you acquire some nonpublic information about a company that will have no predictable effect on the company’s stock price, but will affect the volatility of that stock price. Is that information material nonpublic information for purposes of the prohibition on insider trading?

That’s one of the issues addressed in an interesting article written by Lars Klöhn, a professor at Ludwig-Maximillian University in Munich, Germany. The article, Inside Information without an Incentive to Trade?, is available here. His answer (under European law)? It depends.

Here’s the scenario: one company is going to make a bid to acquire another company. The evidence shows that, on average, the shareholders of bidders earn no abnormal returns when the bid is announced. There’s a significant variation in returns across bids: some companies earn positive abnormal returns and some companies earn negative abnormal returns. But the average is zero. Of course, the identity of the target might affect the expected return, but to pose the problem in its most complex form, let’s assume that you don’t know the target, just that the bidder is planning to make a bid for some other company.

In that situation, the stock is just as likely to…

Andrew Schwartz, a professor at the University of Colorado, has recently published an interesting article discussing how crowdfunding deals with the fundamental problems of startup finance: uncertainty, information asymmetry, and agency costs. His article, The Digital Shareholder, 100 MINN. L. REV. 609 (2015), is available here.

Here’s the abstract:

Crowdfunding, a new Internet-based securities market, was recently authorized by federal and state law in order to create a vibrant, diverse, and inclusive system of entrepreneurial finance. But will people really send their money to strangers on the Internet in exchange for unregistered securities in speculative startups? Many are doubtful, but this Article looks to first principles and finds reason for optimism.

Well-established theory teaches that all forms of startup finance must confront and overcome three fundamental challenges: uncertainty, information asymmetry, and agency costs. This Article systematically examines this “trio of problems” and potential solutions in the context of crowdfunding. It begins by considering whether known solutions used in traditional forms of entrepreneurial finance—venture capital, angel investing, and public companies—can be borrowed by crowdfunding. Unfortunately, these methods, especially the most powerful among them, will not translate well to crowdfunding.

Finding traditional solutions inert, this Article presents five novel solutions…

I mentioned back in October that I spoke in Munich on Regulating Investment Crowdfunding: Small Business Capital Formation and Investor Protection. I discussed how crowdfunding should be regulated, using the U.S. and German regulations as examples.

If you’re interested, that talk is now available here. I expect this to be the top-rated Christmas video on iTunes.

If you want to know more about how Germany regulates crowdfunding, I strongly suggest this article: Lars Klöhn, Lars Hornuf, and Tobias Schilling, The Regulation of Crowdfunding in the German Small Investor Protection Act: Content, Consequences, Critique, Suggestions (June 2, 2015).