On November 15, 2013, the U.S. Supreme Court granted certiorari in the case of Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317, raising the prospect that the Court will overrule or significantly limit the legal presumption that each member of a securities fraud class action relied on the statements challenged as fraudulent in the lawsuit. Without this so-called “fraud-on-the-market” presumption, putative class action plaintiffs will be unable to maintain a securities fraud class action unless they can clear the logistically difficult hurdle of proving that each individual shareholder actually relied on the challenged statements when making its purchase or sale of securities. At least four Justices have recently indicated that the Court should reconsider the validity of that doctrine, suggesting that the ultimate opinion in Halliburton could lead to a significant change in securities class action law. Even if the Court ultimately affirms fraud-on-the-market or some variant of the doctrine, the Court may expand defendants’ ability to defeat what in practice has evolved into a virtually irrefutable presumption of reliance. Furthermore, the uncertainty caused by the pendency of the Halliburton appeal may warrant staying securities class actions and may reduce the settlement value of pending cases.
In the paper, International Corporate Governance Spillovers: Evidence from Cross-Border Mergers and Acquisitions, which was recently made publicly available on SSRN, we investigate whether the change in corporate control following a cross-border M&A leads to changes in corporate governance of non-target firms that operate in the same country and industry as the target firm. We focus on the strategic complementarity in governance choices between the target firm and its rival firms in the local market. We take the view that corporate governance is affected by the choice of other competing firms as in the models developed by Acharya and Volpin (2010), Cheng (2010), and Dicks (2012).
To provide guidance for our empirical analysis, we develop a simple industry oligopoly model, which captures the idea that rival firms operating in a given industry change their governance in response to competitive forces. The spillover effect occurs as firms in an industry recognize that corporate governance is used more efficiently by the target firm and therefore strengthen their own governance as a response. The model has two decision stages and builds on the work of Shleifer and Wolfenzon (2002) and Albuquerque and Wang (2008). In the first stage, outside shareholders choose firm-level governance (i.e., how much to monitor and limit of managerial private benefits), given the governance choices of other firms. In the second stage, firm managers choose output and the level of private benefits that they extract in the context of a symmetric oligopolistic industry. In the Nash equilibrium outcome, managers have an incentive to “overproduce” (because their private benefits increase with revenues) and industry-level profits are not maximized.
Although the 2012 and 2013 proxy seasons saw increased (and highly publicized) shareholder activism across a range of industries, that trend has not yet made its way to the U.S. banking industry. Over the last two proxy seasons, aside from Nelson Peltz’s well-publicized campaign for action at State Street Corporation, certain negative say-on-pay recommendations from ISS and shareholder proposals on governance matters at some large banking organizations (e.g., the campaign to separate the Chairman and CEO positions and to vote against certain directors at JP Morgan Chase), as well as a handful of examples of shareholder activism at community banking institutions, the banking industry has seen relatively little investor activism by comparison. And no investor has conducted a proxy solicitation against a large banking organization since Relational Investors waged a proxy battle against the management and board of directors of Sovereign Bancorp in 2005-06.
The relative absence of activist campaigns targeting banking organizations over the last several years may be explained mainly by current market conditions in the industry, which are not conducive to investor expectations for realizing a profit from an activist campaign against a bank. Most significantly, the absence of a robust bank M&A market with willing buyers that are able to execute transactions at attractive valuations (i.e., a premium to the market price at which the activist acquired the stock) has undermined one of the key exit opportunities for activist investors in the industry. The bank M&A market has been and continues to be adversely affected by uncertainties around asset quality, capital expectations, the regulatory and legislative environment, and the future prospects for the industry as a whole.
Recent events suggest that shareholders pay attention to matters involving the personal lives of CEOs and take this information into account when making investment decisions. In our paper, Separation Anxiety: The Impact of CEO Divorce on Shareholders, which was recently made publicly available on SSRN, we examine the impact that CEO divorce can have on a corporation.
There are at least three potential ways in which a CEO divorce might impact a corporation and its shareholders. The first is loss of control or influence. A CEO with a significant ownership stake in a company might be forced to sell or transfer a portion of this stake to satisfy the terms of a divorce settlement. This can reduce the influence that he or she has over the organization and impact decisions regarding corporate strategy, asset ownership, and board composition. Shareholder reaction to loss of control will vary, depending on the view that investors have of CEO performance and governance quality. If they view performance and governance quality favorably, they will react negatively to the news; if they view management as entrenched or a poor steward of assets, they will react positively. Shareholder reaction will also depend in part on what happens to divested shares, including whether they are transferred to the spouse, sold in a block to a third-party, or dispersed in the general market. Each of these can shape the future governance of a firm.
Last week the Securities and Exchange Commission released its regulatory agenda, and this agenda no longer includes rules requiring public companies to disclose their spending on politics. The agenda now includes only overdue rules that the SEC is required to develop under Dodd-Frank and the JOBS Act. While we are disappointed by the SEC’s decision to delay its consideration of rules requiring disclosure of corporate political spending, we hope that the SEC will consider such rules as soon as it is able to devote resources to rulemaking other than that required by Dodd-Frank and the JOBS Act. The submissions to the SEC over the past two years have clearly demonstrated the compelling case and large support for requiring such disclosure.
We co-chaired a committee of ten corporate and securities law professors that filed a rulemaking petition urging the SEC to develop rules requiring public companies to disclose their spending on politics. In the two years since the petition was submitted, the SEC has received more than 600,000 comment letters on our petition—more than on any other rulemaking project in the Commission’s history. The overwhelming majority of these comments—including letters from institutional investors and Members of Congress—have been supportive of the petition. At the end of 2012, the Director of the SEC’s Division of Corporate Finance acknowledged the widespread support for the petition, and the Commission placed the rulemaking petition on its regulatory agenda for 2013.
On November 5, 2013, the Commodity Futures Trading Commission proposed rules to establish new position limits that would apply to 28 agricultural, energy and metals futures contracts, and swaps, futures and options that are economically equivalent to those contracts.  Once adopted, the proposal would reinstate, with certain changes, the position limit rules that were vacated by a U.S. federal court in 2012 (the “Vacated Rules”).  The CFTC also re-proposed aggregation standards that are similar to those initially proposed as amendments to the Vacated Rules, but with a few notable differences, to be used in applying position limits (the “Aggregation Proposal”). 
The proposals would:
On October 30, 2013, the Office of the Comptroller of the Currency (the “OCC”) issued updated guidance to national banks and federal savings associations on assessing and managing risks associated with third-party relationships, which include all business arrangements between a bank and another entity (by contract or otherwise).  The new guidance introduces a “life cycle” approach to third-party risk management, requiring comprehensive oversight throughout each phase of a bank’s business arrangement with consultants, joint ventures, affiliates, subsidiaries, payment processors, computer network and security providers, and other third parties. Rather than mandating a uniform set of rules, however, the guidance instructs banks to adopt risk management processes commensurate with the level of risk and complexity of its third-party relationships. Accordingly, the OCC expects especially rigorous oversight of third-party relationships that involve certain “critical activities.”
The revamped guidance reflects the OCC’s concern that the increasing risk and complexity of third-party relationships is outpacing the quality of banks’ risk management over these outsourcing arrangements. The guidance cautions that a bank’s failure to implement appropriate third-party risk management processes may constitute an unsafe and unsound banking practice, and could prompt formal enforcement actions or a downgrade in a bank’s CAMELS management rating to less than satisfactory. The severity of these consequences suggests that third-party risk management practices are becoming an increasingly important focus of OCC supervisory efforts.
It has been more than six years since the onset of the credit crisis and we have documented for the first time in the past few months a significant increase in the number and size of settlements. Meanwhile, the pace of new filings has slowed as housing markets continue to improve and delinquencies and defaults decline. However, litigation arising from the credit crisis is far from over.
In this post, we discuss the recent trends of settlement activity and review some of the major settlements in credit crisis litigation. We also discuss mortgage settlements that are related to repurchase demands mainly between mortgage sellers and Fannie Mae and Freddie Mac. We then examine the current trends in filings, including the types of claims made, the nature of defendants and plaintiffs in the litigation, and the financial products involved.
Our main findings, which are discussed in greater detail below, include the following:
In many respects, the relentless drive to adopt corporate governance mandates seems to have reached a plateau: essentially all of the prescribed “best practices”—including say-on-pay, the dismantling of takeover defenses, majority voting in the election of directors and the declassification of board structures—have been codified in rules and regulations or voluntarily adopted by a majority of S&P 500 companies. Only 11 percent of S&P 500 companies have a classified board, 8 percent have a poison pill and 6 percent have not adopted a majority vote or plurality-vote-plus-resignation standard to elect directors. The activists’ “best practices” of yesterday have become the standard practices of today. While proxy advisors and other stakeholders in the corporate governance industry will undoubtedly continue to propose new mandates, we are currently in a period of relative stasis as compared to the sea change that began with the Sarbanes-Oxley Act and unfolded over the last decade.
In other respects, however, the corporate governance landscape continues to evolve in meaningful ways. We may be entering an era of more nuanced corporate governance debates, where the focus has shifted from check-the-box policies to more complex questions such as how to strike the right balance in recruiting directors with complementary skill sets and diverse perspectives, and how to tailor the board’s role in overseeing risk management to the specific needs of the company. Shareholder engagement has been an area of particular focus, as both companies and institutional investors have sought to engage in more regular dialogue on corporate governance matters. The evolving trend here is not only the frequency and depth of engagement, but also a more fundamental re-thinking of the nature of relationships with shareholders and the role that these relationships play in facilitating long-term value creation. Importantly, this trend is about more than just expanding shareholder influence in corporate governance matters; instead, there is an emphasis on the roles and responsibilities of both companies and shareholders in facilitating thoughtful conversations instead of reflexive, off-the-shelf mandates on corporate governance issues, and cultivating long-term relationships that have the potential to curb short-termist pressures in the market.
It is a great honor to have been asked to give the Fifth Annual Judge Thomas A. Flannery Lecture. And it is especially meaningful to be joined tonight by Tom Flannery’s daughter Irene, son Tom, and so many friends, colleagues, and former law clerks who knew and served with him.
I unfortunately did not have the privilege of knowing and working with Judge Flannery. But one of the great benefits of being asked to speak tonight is that it gave me the opportunity to come to know him a little—through learning about his many impressive career accomplishments and through reading his own words and those of others about him. I wish I had known him. He was indeed a remarkable man, lawyer, and judge.
As all here know, Judge Flannery was a highly-respected Assistant United States Attorney, United States Attorney, trial lawyer, and jurist on this court for over 35 years. In fact, he spent most of his life within a few miles of this courtroom.
As part of the Historical Society’s Oral History Project for this Circuit, Judge Flannery gave an interview in 1992. It is a fascinating account of his professional life and the life of this court. Judge Flannery said that his view of the justice system was shaped in great part by watching police court trials here in Washington as a law student.