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Professor Jeremy McClane’s paper, Reconsidering Creditor Governance in a Time of Financial Alchemy, was just published by the Columbia Business Law Review and it’s a doozy.  His thesis is that lenders play an important role in corporate governance by imposing a degree of fiscal discipline on firms’ decisionmaking.  But when loans are securitized, lenders have fewer incentives to exercise control.  By analyzing SEC filings, he finds evidence to suggest that after firms violate financial covenants with lenders, the ones with nonsecuritized loans improve their performance and operate more conservatively, but the ones with securitized loans do not, implying that lenders intervened to force changes in the former category but not the latter.

The upshot: Lenders play an important role in corporate governance, with a view toward curbing the kind of short-term behavior that is often criticized from a stakeholder perspective (i.e., quick payouts that can make the firm more unstable and ultimately harm employees).  Securitization has therefore removed an important constraint on predatory behavior.

I recently had the pleasure of hearing my OU colleague Professor Megan Shaner present her interesting and timely new article, Back to the Future? Reclaiming Shareholder Democracy Through Virtual Annual Meetings (with Professor Yaron Nili).  What an important topic, especially in these unusual times!  An abstract is below:

From demanding greater executive accountability to lobbying for social and environmental policies, shareholders today influence how managers run American corporations. In theory, shareholders exert that influence through the annual meeting: a forum where any shareholder, large or small, can speak their mind, engage with the corporation’s directors and managers, and influence each other. But today’s annual meetings, where a widely diffused group of owners often vote by proxy, are largely pro forma: only handful of shareholders attend the meeting and voting results are largely determined prior to the meeting. In many cases, this leaves Main Street investors’ voice unspoken for.

But modern technology has the potential to resurrect the annual meeting as the deliberative convocation and touchstone of shareholder democracy it once was. COVID-19 has forced most American corporations to hold their annual meetings virtually. Virtual meetings allow shareholders to attend meetings at a low cost, holding the promise…

Mark Roe & Roy Shapira have posted The Power of the Narrative in Corporate Lawmaking on SSRN (here).  Here is the abstract:

The notion of stock-market-driven short-termism relentlessly whittling away at the American economy’s foundations is widely accepted and highly salient. Presidential candidates state as much. Senators introduce bills assuming as much. Corporate interests argue as much to the Securities and Exchange Commission and the corporate law courts. Yet the academic evidence as to the problem’s severity is no more than mixed. What explains this gap between widespread belief and weak evidence?

This Article explores the role of narrative power. Some ideas are better at being popular than others. The concept of pernicious stock market short-termism has three strong qualities that make its narrative power formidable: (1) connotation — the words themselves tell us what is good (reliable long-term commitment) and what is not (unreliable short-termism); (2) category confusion — disparate types of corporate misbehavior, such as environmental degradation and employee mistreatment, are mislabeled as being truly and primarily short-termism phenomena emanating from truncated corporate time horizons (when they in fact emanate from other misalignments), thereby making us view short-termism as even more rampant and pernicious than it is…

       Hope everyone is doing ok these days.  I have found that by lowering my expectations for myself, I manage to feel a great deal of accomplishment.  For example, so long as I shower 15 minutes before my 2:30 pm class (yes, pm), I give myself a hearty pat on the back.

       (Just kidding by the way.  I am almost always showered by 2:00 pm.  [Winky-face emoji if I could do it.])

       In working on some presentations with Professor Daniel Kleinberger, I spent some time looking at how statutes and judicial decisions have defined the closely held corporation for purposes of offering oppression-related relief.  I wrote up some of my preliminary findings below, which you may (or may not) find interesting.  This is just a draft, so please excuse any errors:

      The cause of action for oppression is designed to provide relief to minority shareholders in closely held corporations. That said, jurisdictions differ in how they define the corporations that are subject to the oppression action, which in turn creates differences in the shareholders who are eligible for oppression-related protection.

      In jurisdictions with dissolution-for-oppression statutes, some provide no limitation on…

The United States Postal Service (USPS) has been in the news a lot more than usual lately. Amid controversies over the summer appointment of Louis DeJoy (a former corporate executive with no previous experience in the agency) as the Postmaster General, and more recent coverage of the Postal Service’s role in the upcoming election (and their ability to handle the uptick in mail-in voting) this widely-lauded government service has been the target of increasing calls for privatization.  Given President Trump’s open disdain for USPS, the results of the November election may well determine the future trajectory of this agency. Specifically, votes this November will likely determine whether USPS will remain within the ambit of its original intention: as a public trust for the citizens of the United States or become a privatized corporation where a profit making purpose is imposed on the new incarnation of the Postal Service in a way that will likely lead to disaster for all.  In a longer essay, (that will be published in the Texas Law Review Online) we provide an in-depth look into the Postal Service’s history and mission.  Here, we would like to take a moment to truly unpack the implications of placing a corporate veneer on a public service agency.

The Ninth Circuit just issued a loss causation opinion in In re BofI Securities Litigation, and it’s so beautiful, it gets so much right, it’s like staring at the sun, or the face of God. Birds sang, angels wept, my sinuses have been cleared, my freezer is defrosted, and all that’s left for me to do before I depart from this Earth is see Wonder Woman 1984 in theaters.

The background is a bit complex. BofI is the subject of two 10(b) securities class actions, covering different time periods.  The first alleges that the Bank lied about its lending practices, and the second alleges that the Bank lied about investigations into those lending practices.  Both cases were heard before the same district court judge, and the court dismissed both sets of claims on loss causation grounds, employing a particularly vigorous – nay, implausible – view of market efficiency. 

I blogged about second of those dismissals here, where I explained that the plaintiffs in that action had alleged that the fraud was revealed when a reporter for the New York Post filed a FOIA request and wrote an article about his findings.  The court rejected plaintiffs’ allegations of loss…

BLPB Readers,

Exciting news!  On the morning of October 14, 2020, the Systemic Risk Council is offering a webinar on Ensuring Financial Stability: Relaunching the Reform Debate After Pandemic Dislocation.  The Agenda looks fantastic! A brief summary of the program is below:

The stimulus response to the global pandemic has surfaced new debates and highlighted lingering questions about the role of central banks, accountability, reform, and the roles of levered markets and shadow banking.  This Systemic Risk Council program brings together leading voices to explore how the financial industry, regulators, and policy makers can address key issues around bank stability, resolution, and the mounting leverage in the global economic system.

I usually leave the arcana of contract interpretation principles to the specialists, but every now and then I apparently dip my toe in, and this is another of those weeks.

VC Laster’s opinion in In re Anthem-Cigna Merger Litigation tells a truly wild tale.  In brief, Anthem and Cigna agreed to merge, but Cigna’s CEO, David Cordani, wanted to helm the combined entity. When it became clear he wouldn’t get the CEO spot, he began a campaign of sabotage, assisted by Cigna executives who supported his ambitions.  Thus, Cigna’s top leadership hired a PR firm to trash talk the merger while concealing the firm’s involvement from Cigna’s Board.  At one point, Cigna’s General Counsel personally leaked certain letters so they would be disclosed publicly, then tasked her head of litigation with conducting an internal investigation to discover the source of the leak.  Cigna’s foot-dragging with respect to integration planning and responding to regulators was so profoundly passive-aggressive that I felt my blood pressure rising – and this is despite the fact that Anthem was not exactly an angel: it lied in federal court proceedings, and the overall merger would certainly have reduced competition in an already-consolidated industry.

In any…

The SEC made its long-awaited revisions to Rule 14a-8, which dramatically increase the dollar investment requirements, add a new prohibition on allowing shareholders to aggregate their holdings to meet those requirements, prohibit shareholder representatives from advancing proposals on behalf of more than one shareholder per meeting, and raise the resubmission thresholds, among other things.  In practical effect, these rules make it much more difficult for retail shareholders – who are unlikely to hold $15K or $25K of a single company’s stock in their portfolio – to advance proposals.  And, as Yaron Nili and Kobi Kastiel have documented, retail shareholders (and specific retail shareholders at that) have been the driving force behind a large number of proposals.  They find that – despite critics’ claims that these “gadflies” are advancing a personal agenda – their proposals frequently win majority support.  Thus, important corporate governance innovations have been driven, in part, by proposals advanced by retail investors.

Retail investors are not the only ones who advance proposals, though; pension funds do, as well.  That’s where the Department of Labor comes in.  As I previously blogged, the DoL has proposed new rules that would sharply limit ERISA plans’ ability to participate…

FINRA recently filed a rule proposal with the SEC to alter, yet again, it’s rules for facilitating the deletion of customer complaint information from the Central Registration Depository database.  The proposal will likely do some good, but doesn’t seem to meaningfully increase the likelihood that this adversarial process will reliably surface relevant information.  Still, FINRA contends that the changes aim to “place an arbitrator or panel in a better position to determine whether to recommend expungement of customer dispute information, and thereby help ensure the accuracy of the customer dispute information contained in the CRD system and displayed through BrokerCheck.”  The raft of proposed changes effectively concede that for years the current system has not ensured that arbitrators were well-situated to decide these expungement claims.

For the most part, the proposal codifies existing guidance, adds some time limits, and aims to address other known issues.  For example, a broker would not be able to request expungement if “more than six years have elapsed since the date that the customer complaint was initially reported to the CRD system” or more than two years after the close of an arbitration filing.  The proposal also bars “straight-in” expungement requests against customers–something that only…