May 14, 2020

Securitization

Securitization

Seventh Annual Review of Developments in Business Financing
      committee on Developments in Business Financing, 46(2): 693–717 (Feb. 1991)
In the seventh annual review, the committee covers developments with respect to "Section 20" subsidiaries, disintermediation, international stock swaps, and Pacific Rim equity offerings by affiliates of U.S. companies. The history and status of even risk provisions are presented here, together with updates on junk bonds, other highly leveraged transactions, convertible zeroes, and securitization.

Structured Finance Goes Chapter 11: Asset Securitization by Reorganizing Companies
      Stephen I. Glover, 47(2): 611–46 (Feb. 1992)
Over the past few years, an increasing number of businesses that generate loans and receivables have satisfied their cash needs by engaging in structured finance transactions. These transactions are designed to protect lenders from the risk that the business will become the subject of bankruptcy proceedings. This Article examines the feasibility of structured financings by companies that are already in Chapter 11 proceedings and concludes that such transactions should be workable.

Financing American Health Security: The Securitization of Healthcare Receivables
      Charles E. Harrell and Mark D. Folk, 50(1): 47–97 (Nov. 1994)
Due to the declining population, the emergence of managed care, and the possibility of legislative reform, healthcare providers are facing unprecedented financial pressures and liquidity shortfalls. As a result, increasing numbers of providers may need to resort to the capital markets for funding. This Article analyzes the legal principles and structural issues involved in the securitization of healthcare receivables, a financial vehicle that may help many providers address their financial concerns.

Securitization of Oil, Gas, and Other Natural Resource Assets: Emerging Financing Techniques
      Charles E. Harrell, James L. Rice III, and W. Robert Shearer, 52(3): 885–946 (May 1997)
Written from both a legal and business perspective, the Article is a practical guide to securitizing oil and gas assets. The Article walks the reader through the issues that must be considered and provides thorough descriptions of several recent transactions, with particular attention to the securitization of future receivables tied to anticipated proceeds of production of oil and gas.

Financing Small Bank Holding Companies: Securitization of Capital Securities
      John J. Madden, 54(1): 93–118 (Nov. 1998)
In 1996, the Federal Reserve Board issued a one-page release allowing bank holding companies to include capital securities as a component of their Tier 1 regulatory capital requirement. For tax purposes, distributions on capital securities are deductible to the issuing company, making them the cheapest source of Tier 1 qualifying regulatory capital. Unlike large banking organizations, very few small bank holding companies have issued these securities. This Article summarizes the obstacles facing small bank holding companies interested in issuing capital securities. In conclusion, the author recommends utilizing asset securitization as a means of providing small bank holding companies with access to the capital markets to issue these tax-advantaged securities.

Commercial Trusts as Business Organizations: Unraveling the Mystery
     Steven L. Schwarcz, 58(2): 559 (Feb. 2003)
Although the law focuses almost exclusively on gratuitous trusts, the increasingly dominant use of trusts is for securitization and other distinctly nongratuitous commercial transactions. This shift has occurred without a systematic understanding of whether commercial trusts are a better form of business organization than traditional alternatives, such as corporations. Furthermore, few have even considered whether existing trust law is adequate to govern commercial trusts. This Article builds an analytical framework in which to attempt to examine these issues. In that context, it argues that commercial trusts and corporations can be viewed as mirror-image entities that respond to different investor needs.

Framework for Control over Electronic Chattel PaperÂ-Compliance with UCC § 9–105
      Working Group on Transferability of Electronic Financial Assets, a Joint Working Group of the committee on Cyberspace Law and the committee on the Uniform Commercial Code of the ABA Section of Business Law and The Open Group Security Forum, 61(2):721—744 (February 2006)

Initial Report of the Joint Task Force on Deposit Accounts Control Agreements
      Joint Task Force on Deposit Account Control Agreements, ABA Section of Business Law, 61(2):745—796 (February 2006)

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.

Special Report on the Preparation of Substantive Consolidation Opinions
The committee on Structured Finance and the committee on Bankruptcy and Corporate Reorganization of The Association of the Bar of the City of New York, 64(2): 411-432 (February 2009)

Article 9 of the UCC: Reconciling Fundamental Property Principles and Plain Language
     Thomas E. Plank; 68(2): 439-506 (February 2013) 
Article 9 of the Uniform Commercial Code, which governs (i) the grant of a security interest in personal property to secure payment or performance of an obligation—a “true security interest”—and (ii) the sale of receivables, incorporates the primary property law principle of nemo dat quod non habet—one cannot transfer an interest in property that one does not have—and its corollary —a transferee can receive what the transferor has and no more. For good policy reasons, however, Article 9 also enacts the innovative exception to nemo dat, the Filing Priority Principle codified in the “first-to-file-or-perfect rule,” that permits a secured party who first files a financing statement to obtain a superior security interest over a secured party who first obtains a security interest and would otherwise prevail under nemo dat. For true security interests, the plain language of Article 9 effectuates the policies of nemo dat and the Filing Priority Principle.

U.C.C. Article 9, Filing-Based Priority, and Fundamental Property Principles: A Reply to Professor Plank
     Steven L. Harris and Charles W. Mooney, Jr., 69(1): 79-92 (November 2013)
Uniform Commercial Code Article 9 generally follows the common law principle that one cannot give rights in property that one does not have (nemo dat quod non habet). In many circumstances, however, the priority rules under Article 9, including its rule awarding priority to the first security interest that is perfected or as to which a financing statement has been filed, trump nemo dat and enable a debtor to grant a senior security interest in property that the debtor previously had encumbered. In this article, Professors Steven Harris and Charles Mooney argue that, properly understood, the first-to-file-or-perfect rule confers upon a debtor the power to create a security interest in accounts and other rights to payment that the debtor has already sold and in which it retains no interest. In doing so, the authors take issue with Professor Thomas Plank, whose argument to the contrary appeared in the February 2013 issue of The Business Lawyer.

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.