SEC Enforcement Proceedings Under Section 15(c)(4) of the Securities Exchange Act of 1934
William R. McLucas and Laurie Romanowich, 41(1): 145–74 (Nov. 1985)
The SEC has administrative powers under section 15(c)(4) of the Exchange Act to enforce certain reporting provisions of the Act. In a 1984 amendment to the statute, the SEC's enforcement authority under section 15(c)(4) was broadened to include violations of section 14 of the Exchange Act, which now brings proxy and tender offer violations within the reach of the agency's administrative enforcement powers. Further, the amendment expressly empowers the agency to pursue administrative remedies against individuals who were "a cause of" violations of certain provisions of the Act. This Article analyzes the SEC's past use of this administrative enforcement power, as well as several issues the agency has confronted in connection with these proceedings, and explores some of the questions that may arise as a result of the recent expansion of the scope of section 15(c)(4).
The Evolution of the 1992 Shareholder Communication Proxy Rules and Their Impact on Corporate Governance
Norma M. Sharara and Anne E. Hoke-Witherspoon, 49(1): 327–58 (Nov. 1993)
The SEC received a record number of comment letters regarding its revisions to the proxy rules governing shareholder communications. These changes were brought about in large part due to pressure from institutional investors. The authors summarize the rulemaking process and analyze the impact of the new rules, particularly with respect to institutional investors.
Shareholder Activism and Insurgency Under the New Proxy Rules
Thomas W. Briggs, 50(1): 99–149 (Nov. 1994)
This Article addresses what the SEC's new proxy rules mean for shareholder activists and insurgents, particularly those ready and able to conduct a proxy contest for corporate control. The Article focuses on tactical and legal issues under the proxy rules and the rules under section 13(d) of the Exchange Act.
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.
Cross–Border Tender Offers and Other Business Combination Transactions and the U.S. Federal Securities Laws: An Overview
Jeffrey W. Rubin, John M. Basnage, and William J. Curtin, III, 61(3):1071—1134 (May 2006)
In structuring cross–border tender offers and other business combination transactions, parties must consider carefully the potential application of U.S. federal securities laws and regulations to their transaction. By understanding the extent to which a proposed transaction will be subject to the provisions of U.S. federal securities laws and regulations, parties may be able to structure their transaction in a manner that avoids the imposition of unanticipated or burdensome disclosure and procedural requirements and also may be able to minimize potential conflicts between U.S. laws and regulations and foreign legal or market requirements. This article provides a broad overview of U.S. federal securities laws and regulations applicable to cross–border tender offers and other business combination transactions, including a detailed discussion of Regulations 14D and 14E under the Securities Exchange Act and the principal accommodations afforded to foreign private issuers thereunder.
Breaking the Corporate Governance Logjam in Washington: Some Constructive Thoughts on a Responsible Path Forward
Leo E. Strine, Jr., 63(4): 1079–1108 (August 2008)
Private Ordering and the Proxy Access Debate
Lucian A. Bebchuk and Scott Hirst, 65(2): 329–360 (February 2010)
This Article examines two "meta" issues raised by opponents of the SEC's proposal to provide shareholders with rights to place director candidates on the company's proxy materials. First, opponents argue that, even assuming proxy access is desirable in many circumstances, the existing no-access default should be retained and the adoption of proxy access arrangements should be left to opting out of this default on a company-by-company basis. This Article, however, identifies strong reasons against retaining no-access as the default. There is substantial empirical evidence indicating that director insulation from removal is associated with lower firm value and worse performance. Furthermore, when opting out from a default arrangement serves shareholder interests, a switch is more likely to occur when it is favored by the board than when disfavored by the board. We analyze the impediments to shareholders' obtaining opt-outs that they favor but the board does not, and we present evidence indicating that such impediments are substantial. The asymmetry in the reversibility of defaults highlighted in this Article should play an important role in default selection.
Second, opponents of the SEC's proposed reforms argue that, if the SEC adopts a proxy access regime, shareholders should be free to opt out of this regime. We point out the tensions between advocating such opting out and the past positions of many of the opponents, as well as tensions between opting out and the general approach of the proxy rules. Nonetheless, we support allowing shareholders to opt out of a federal proxy access regime, provided that the opt-out process includes necessary safeguards. Opting out should require majority approval by shareholders in a vote where the benefits to shareholders of proxy access are adequately disclosed, and shareholders should be able to reverse past opt-out decisions by a majority vote at any time.
The implications of our analysis extend beyond proxy access to the choice of default rules for corporate elections, and to the ways in which shareholders should be able to opt out of election defaults. In particular, the current plurality voting default should be replaced with a majority voting default, and existing impediments to the ability of shareholders to opt out of arrangements that make it difficult to replace directors should be re-examined.
The SEC's Proposed Proxy Access Rules: Politics, Economics, and the Law
Joseph A. Grundfest, 65(2): 361–394 (February 2010)
The U.S. Securities and Exchange Commission has proposed proxy rules that would mandate shareholder access under conditions that could be modified by a shareholder majority to make proxy access easier, but not more difficult. From a legal perspective, this Mandatory Minimum Access Regime is so riddled with internal contradictions that it is unlikely to withstand review under the arbitrary and capricious standard of the Administrative Procedure Act. In contrast, a fully enabling opt-in proxy access rule is consistent with the administrative record developed to date and can be implemented with little delay.
From a political perspective, and consistent with the agency capture literature, the Proposed Rules are easily explained as an effort to generate benefits for constituencies allied with currently dominant political forces, even against the will of the shareholder majority. Viewed from this perspective, the Proposed Rules have nothing to do with shareholder wealth maximization or optimal corporate governance, but instead reflect a traditional contest for economic rent common to political brawls in Washington, D.C.
From an economic perspective, if the Commission decides to implement an opt-out approach to proxy access, it will then confront the difficult problem of defining the optimal proxy access default rule. The administrative record, however, currently contains no information that would allow the Commission objectively to assess the preferences of the shareholder majority regarding proxy access at any publicly traded corporation. To address this gap in the record, the Commission could conduct a stratified random sample of the shareholder base, and rely on the survey's results to set appropriate default proxy access rules. The Commission's powers of introspection are insufficient to divine the value-maximizing will of the different shareholder majorities at each corporation subject to the agency's authority.
Preemption as Micromanagement
Larry Ribstein, 65(3): 789–798 (May 2010)
Massey Prize for Research in Law, Innovation, and Capital Markets Symposium—Foreword
70(2): 319-320 (Spring 2015)
Financial Innovation and Governance Mechanisms: The Evolution of Decoupling and Transparency
Henry T. C. Hu; 70(2): 347-406 (Spring 2015)
Financial innovation has fundamental implications for the key substantive and information-based mechanisms of corporate governance. “Decoupling” undermines classic understandings of the allocation of voting rights among shareholders (via, e.g., “empty voting”), the control rights of debtholders (via, e.g., “empty crediting” and “hidden interests”/ “hidden non-interests”), and of takeover practices (via, e.g., “morphable ownership” to avoid section 13(d) disclosure and to avoid triggering certain poison pills). Stock-based compensation, the monitoring of managerial performance, the market for corporate control, and other governance mechanisms dependent on a robust informational predicate and market efficiency are undermined by the transparency challenges posed by financial innovation. The basic approach to information that the SEC has always used—the “descriptive mode,” which relies on “intermediary depictions” of objective reality—is manifestly insufficient to capture highly complex objective realities, such as the realities of major banks heavily involved with derivatives. Ironically, the primary governmental response to such transparency challenges—a new system for public disclosure that became effective in 2013, the first since the establishment of the SEC—also creates difficulties. This new parallel public disclosure system, developed by bank regulators and applicable to major financial institutions, is not directed primarily at the familiar transparency ends of investor protection and market efficiency.
As starting points, this Article offers brief overviews of: (1) the analytical framework developed in 2006−2008 for “decoupling” and its calls for reform; and (2) the analytical framework developed in 2012−2014 reconceptualizing “information” in terms of three “modes” and addressing the two parallel disclosure universes.
As to decoupling, the Article proceeds to analyze some key post- 2008 developments (including the status of efforts at reform) and the road ahead. A detailed analysis is offered as to the landmark December 2012 TELUS opinion in the Supreme Court of British Columbia, involving perhaps the most complicated public example of decoupling to date. The Article discusses recent actions on the part of the Delaware judiciary and legislature, the European Union, and bankruptcy courts—and the pressing need for more action by the SEC. At the time the debt decoupling research was introduced, available evidence as to the phenomenon’s significance was limited. This Article helps address that gap.
As to information, the Article begins by outlining the calls for reform associated with the 2012−2014 analytical framework. With revolutionary advances in computer- and web-related technologies, regulators need no longer rely almost exclusively on the descriptive mode rooted in intermediary depictions. Regulators must also begin to systematically deploy the “transfer mode” rooted in “pure information” and the “hybrid mode” rooted in “moderately pure information.” The Article then shows some of the key ways that the new analytical framework can contribute to the SEC’s comprehensive and long-needed new initiative to address “disclosure effectiveness,” including in “depiction-difficult” contexts completely unrelated to financial innovation (e.g., pension disclosures and high technology companies). The Article concludes with a concise version of the analytical framework’s thesis that the new morphology of public information—consisting of two parallel regulatory universes with divergent ends and means—is unsustainable in the long run and involve certain matters that need statutory resolution. However, certain steps involving coordination among the SEC, the Federal Reserve, and others can be taken in the interim.
Securing Our Nation’s Economic Future: A Sensible, Nonpartisan Agenda to Increase Long-Term Investment and Job Creation in the United States
Leo E. Strine, Jr., 71(4): 1081-1112 (Fall 2016)
These days it has become fashionable to talk about whether the incentive system for the governance of American corporations optimally encourages long-term investment, sustainable policies, and therefore creates the most long-term economic and social benefit for American workers and investors. Many have come to the conclusion that the answer to that question is no. As these commentators note, the investment horizon of the ultimate source of most equity capital—human beings who must give their money to institutional investors to save for retirement and college for their kids—is long. That horizon is much more aligned with what it takes to run a real business than that of the direct stockholders, who are money managers and are under strong pressure to deliver immediate returns at all times. Americans want corporations that are focused on sustainable wealth and job creation. But there is too little talk accompanied by a specific policy agenda to address that incentive system.
This Article proposes a genuine, realistic agenda that would better promote a sustainable, long-term commitment to economic growth in the United States. This agenda should not divide Americans along party lines. Indeed, most of the elements have substantial bipartisan support. Nor does this agenda involve freeing corporate managers from accountability to investors for delivering profitable returns. Rather, it makes all those who represent human investors more accountable, but for delivering on what most counts for ordinary investors, which is the creation of durable wealth by socially responsible means.
The fundamental elements of this strategy to promote long-term American competitiveness include: (i) tax policy that discourages counterproductive behavior and encourages investment and work; (ii) investment policies to revitalize our infrastructure, address climate change, create jobs, and close our deficit; (iii) reforming the incentives of and enhancing the fiduciary accountability of institutional investors; (iv) reducing the focus on quarterly earnings estimates and improving the quality of information provided to investors; and (v) an American commitment to an international level playing field to reduce incentives to offshore jobs, erode the social safety net, and pollute the planet.
The Bylaw Puzzle in Delaware Corporate Law
David Skeel; 72(1): 1-30 (Winter 2016/2017)
In less than a decade, Delaware’s legislature has overruled its courts and reshaped Delaware corporate law on two different occasions: with proxy access bylaws in 2009 and with shareholder litigation bylaws in 2015. Having two dramatic interventions in quick succession would be puzzling under any circumstances. The interventions are even more puzzling because with proxy access, Delaware’s legislature authorized the use of bylaws or charter provisions that Delaware’s courts had banned, and with shareholder litigation, it banned bylaws or charter provisions that the courts had authorized. This article attempts to unravel the puzzle.
Starting with corporate law doctrine, I find that a doctrinal account has more explanatory power than one might initially expect. In particular, Delaware’s courts appear to be zealous in protecting the discretion of corporate managers and directors, whereas the legislature on each occasion intervened to revitalize shareholder protections. But this distinction leaves a variety of questions unanswered, such as the rapidity of the legislature’s response and its use of a default rule with proxy access, as compared to a mandatory shareholder litigation rule. To more fully explain the interventions, we need to consider several other factors, including the importance of protecting the credibility of Delaware’s judges. The credibility concern suggests that legislative thunderbolts are unlikely to become routine because routine legislative intervention would undercut the authority of Delaware’s judiciary.
Dilution, Disclosure, Equity Compensation, and Buybacks
Bruce Dravis, 74(3) 631-658 (Summer 2019)
Equity compensation and company share buybacks are complementary: Equity compensation share issuances increase outstanding shares; buybacks decrease outstanding shares. Yet the two types of transactions require very different approval processes and securities and financial disclosures, and generate different financial and tax results, all of which are described in this article, and illustrated by data collected from fifty-nine of America’s largest public companies. This article encourages critics of buybacks to consider the complexity and interrelationship of buybacks and equity compensation.