Employee Retirement Income Security Act of 1974 (ERISA)
Directed Brokerage and "Soft Dollars" Under ERISA: New Concerns for Plan Fiduciaries
Donald J. Myers, 42(2): 553–73 (Feb. 1987)
Recent pronouncements by the Department of Labor and the SEC have once again focused the attention of the pension community on soft dollar and directed brokerage arrangements. The Article examines new concerns surrounding such arrangements in light of the fiduciary responsibility provisions of ERISA, emphasizing the duties of plan sponsors and money managers in monitoring investment and execution decisions and in directing brokerage transactions. The issues discussed in the Article should be of interest to any business lawyer whose clients sponsor employee benefit plans or are involved in the investment or trading of securities for such plans.
ESOPs: What They Are and How They Work
Henry C. Blackiston III, Linda E. Rappaport, and Lawrence A. Pasini, 45(1): 85–143 (Nov. 1989)
The rapid expansion in the number and size of employee stock ownership plans has put ESOPs under increasing public scrutiny. This Article reviews the legal rules applicable to ESOPs, including tax qualification requirements, ESOP stock allocation rules, tax benefits and incentives, ERISA fiduciary considerations, accounting treatment, and securities law considerations. The Article also explores the current use of ESOPs in financial transactions including leveraged buy-outs and securitized ESOP loans. Finally, the Article identifies and discusses issues of practical importance to practitioners in the ESOP area.
The Fiduciary Duties of Institutional Investors in Securities Litigation
Craig C. Martin & Matthew H. Metcalf, 56(4): 1381 (Aug. 2001)
The Private Securities Litigation Reform Act of 1995 was enacted to expand the role of institutional investors in securities litigation in the hopes that such involvement would serve to moderate what were widely perceived as abusive litigation practices in this area. However, these institutional investors must also observe their significant fiduciary obligations under the Employee Retirement Income Security Act. The Article discusses the redefined role of institutional investors in securities litigation in light of both of these pieces of legislation and examines some potential benefits and unique concerns that institutional investors must now consider when a securities fraud claim arises.
Composing a Balanced and Effective Board to Meet New Governance Mandates
John F. Olson and Michael T. Adams, 59(2): 421–52 (Feb. 2004)
The enactment of the Sarbanes-Oxley Act of 2002 and the recent adoption of new corporate governance listing standards by the major American securities markets have resulted in a number of prescriptions that influence the selection of directors of U.S. public companies. These requirements are in some respects inconsistent with the traditional agency role of the monitoring board and, more important, may conflict with optimal functioning of the board as a group. The authors survey the literature on the role of the board and board dynamics, examine the new constraints and their impact on director qualification and selection, and offer ten practical suggestions for director selection that will help nominating and governance committees of public companies to assemble boards of directors that will effectively perform their critical monitoring functions in the new regulatory environment.
Empty Voting and Hidden (Morphable) Ownership: Taxonomy, Implications, and Reforms
Henry T. C. Hu and Bernard Black, 61(3):1011–1070 (May 2006)
Most American publicly held corporations have a one-share, one-vote structure, in which voting power is proportional to economic ownership. This structure gives shareholders economic incentives to exercise their voting power well and helps to legitimate managers' exercise of authority over property the managers do not own. Berle-Means' "separation of ownership and control" suggests that shareholders face large collective action problems in overseeing managers. Even so, mechanisms rooted in the shareholder vote, including proxy fights and takeover bids, constrain managers from straying too far from the goal of shareholder wealth maximization.
In the past few years, the derivatives revolution, hedge fund growth, and other capital market developments have come to threaten this familiar pattern throughout the world. Both outside investors and corporate insiders can now readily decouple economic ownership of shares from voting rights to those shares. This decoupling—which we call "the new vote buying"—is often hidden from public view and is largely untouched by current law and regulation. Hedge funds, sophisticated and largely unfettered by legal rules or conflicts of interest, have been especially aggressive in decoupling. Sometimes they hold more votes than economic ownership, a pattern we call "empty voting." That is, they may have substantial voting power while having limited, zero, or even negative economic ownership. In the extreme situation of negative economic ownership, the empty voter has an incentive to vote in ways that reduce the company's share price. Sometimes hedge funds hold more economic ownership than votes, though often with "morphable" voting rights—the de facto ability to acquire the votes if needed. We call this "hidden (morphable) ownership" because under current disclosure rules, the economic ownership and (de facto) voting ownership are often not disclosed. Corporate insiders, too, can use new vote buying techniques.
This article analyzes the new vote buying and its corporate governance implications. We propose a taxonomy of the new vote buying that unpacks its functional elements. We discuss the implications of decoupling for control contests and other forms of shareholder oversight, and the circumstances in which decoupling could be beneficial or harmful to corporate governance. We also propose a near-term disclosure-based response and sketch longer-term regulatory possibilities. Our disclosure proposal would simplify and partially integrate five existing, inconsistent share-ownership disclosure regimes, and is worth considering independent of its value with respect to decoupling. In the longer term, other responses may be needed; we briefly discuss possible strategies focused on voting rights, voting architecture, and supply and demand forces in the markets on which the new vote buying relies.
How Safe Are Institutional Assets in a Custodial Bank’s Insolvency?
Edward H. Klees,68(1): 103 - 136 (November 2012)
It is a widely held belief among institutional investors that custody accounts are protected against a bank's insolvency in the United States. This assumption undergirds trillions of dollars of assets held in custody in U.S. banks. However, despite the 2008 financial crisis, little if any attention has been paid to analyzing whether this belief is, indeed, valid. This article argues that while the FDIC, as receiver of almost all failed banks in the United States, will likely protect custodied assets to the extent permitted by law, clients bear several significant legal and operational risks that could limit recovery of their custodied assets. While investors can protect against some risks, others may be outside their control. The article outlines these risks and proposes ameliorative steps for institutional investors.