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On Friday, Elisabeth Kempf presented her new paper, co-authored with Oliver Spalt, at Tulane’s Freeman School of Business, Taxing Successful Innovation: The Hidden Cost of Meritless Class Action Lawsuits. Here is the abstract:

Meritless securities class action lawsuits disproportionally target firms with successful innovations.  We establish this fact using data on securities class action lawsuits against U.S. corporations between 1996 and 2011 and the private economic value of a firm’s newly granted patents as a measure of innovative success. Our findings suggest that the U.S. securities class action system imposes a substantial implicit “tax” on highly innovative firms, thereby reducing incentives to innovate ex ante. Changes in investment opportunities and corporate disclosure induced by the innovation appear to make successful innovators attractive litigation targets.

Using dismissal as a proxy for meritless – a point to which I will return – Kempf and Spalt find that firms that are granted valuable patents are more likely to be targeted by a class action lawsuit than other firms in the following year, and that the difference is driven by meritless lawsuits.  The finding persists even controlling for firm size, sales growth, stock price returns, and volatility.  They also find that these lawsuits…

Most Americans lack basic financial literacy.  One recent study found that about two thirds of Americans cannot correctly answer basic questions about interest rates and ordinary economic calculations.  It isn’t a surprising finding.  Put simply, most people need help when it comes to handling financial planning and investing decisions.

There are different ways to solve the problem.  One way is to focus on increasing financial literacy by doing more education and outreach.  That approach hasn’t shown great results so far.  Another mechanism for improving financial decision-making is to pair people with competent financial advisers and planners.   In theory, financial advisers can improve financial outcomes for their clients by helping them make the best decisions for their situation.  Unfortunately, the law in most states doesn’t require persons providing financial advice to act in the best interests of their clients.  Nevada is a notable, recent exception.

Many people working with financial advisers walk in with a mistaken default expectation that financial advisers must give advice in the best interests of their clients.  This perception may exist because of the constant drumbeat of trust-focused advertisements from financial services firms. With mismatched expectations and commission-compensated financial advisers, ordinary customers routinely find themselves steered…

Another week, another Delaware Chancery decision in which a powerful, visionary minority blockholder is deemed to have “control” over a corporate board’s decision to acquire a company in which he has an interest.

In In re Oracle Corporation Derivative Litigation, which I blogged about last week, Larry Ellison’s control was enough to show that demand was excused for the purpose of a derivative lawsuit, while the court avoided the question whether Ellison should be formally deemed a controlling stockholder.

In In re Tesla Motors Stockholder Litigation, however, the question could not be avoided.  That’s because – unlike in Oracle – the remaining stockholders voted in favor of the acquisition, which led the defendants to argue that the entire deal had been cleansed under Corwin v. KKR Financial Holdings LLC.   Since Corwin does not apply to controlling stockholder transactions, Elon Musk’s status became critical.

Briefly, Elon Musk is the Chair, CEO, largest stockholder (22% at the time of the acquisition), and dominant face of Tesla.  He was also one of the founders of SolarCity, along with his cousins.  When SolarCity neared bankruptcy, Tesla acquired SolarCity at a significant premium to its market price.  Though Musk formally recused…

Interest rate risk seems to puzzle some students when they first encounter it.  It’s the idea that fixed-rate assets decline in value when interest rates rise.   I’ve started using a simplified bond trading exercise to help students get the concept quickly.  This is how it works. 

Give A Student A Bond

I find a few victims/volunteers and give them brightly colored pieces of paper.  These, I tell them, represent fixed rate bonds with a $10,000 value, paying 5% a year for the next twenty years.  We run through some basic questions.  How much money do they get each year ($500).  How much money will they get if they hold the bond to maturity?  ($20,000.  This is the amount of the bond plus another $10,000 in interest).  For the exercise, we keep it simple and just look at the cash flow coming off the one bond.

Change The Rates

After everyone gets the idea, I clap my hands and change the prevailing market interest rate from 5% to 8%.  This leaves our initial volunteer holding a 5% bond in an 8% market.  With a flourish, I pull out more brightly colored paper of a different shade and announce that I’m now…

I am intrigued by VC Glasscock’s recent decision in In re Oracle Corporation Derivative Litigation, where he found that demand was excused with respect to a claim that Larry Ellison breached his fiduciary duties by functionally directing that the company acquire Netsuite, in which he owned a 39% stake. 

First, the treatment of Larry Ellison:  He only owns 27% of Oracle and, though he remains Chair of the Board, he no longer occupies the role of CEO.  Nonetheless, the court was willing to draw the pleading-stage inference that he functionally has control of the company, such that both the outside and inside directors would fear for their positions if they crossed them.  Yet at the same time, the court was unwilling to go so far as to formally designate him as a “controlling shareholder,” with all of the scrutiny that role would attract.  In some ways, this is a welcome recognition that control is not simply an on/off switch: degrees of control may exist along a spectrum, and may compromise (nominally) independent directors’ judgment only so long as the relevant decision is not too extreme.  At the same time, Delaware law tends to treat control status as binary, and…