Richard Paul Richman Center for Business, Law and Public Policy
Felipe Rezende, Assistant Professor of Economics, Hobart and William Smith Colleges
Camila Duran, Assistant Professor of Law University of São Paulo
Leonardo Burlamaqui, Associate Professor of Economics, The State University of Rio de Janeiro
Topic for Discussion: "Regulation and Stability in Brazil: New Perspectives"
Abstract: This seminar will explore the legal, political, and architectural challenges of building institutions that promote capital development without spurring instability or crisis. Presentations will focus on the case study of Brazil. Questions to be addressed include:
Jerome Greene Hall, Room 103
Luca Enriques, Spring 2016, Oxford University Exchange Visiting Professor
Topic for Discussion: "Prospectus Regulation Reform in the EU: Thinking Outside the Box"
Abstract: As one of the initiatives to implement its plan for a Capital Markets Union, the European Commission recently proposed to replace the existing legal framework for public offerings with a new regulation. The new regulation brings some incremental changes to the existing framework, in the direction of lowering the burdens for issuers (via broader exemptions for secondary offerings, an attempt to increase the use of shelf registration, simplified prospectuses for small issuers) and of making prospectuses more comprehensible for retail investors (via shorter summaries and limits on the use of risk factors). The building blocks of the current regime would remain the same. Chief among them are, first, the idea of a prospectus to be drafted pursuant to detailed schedules identifying required disclosures item by item and, second, pre-approval of the prospectus by competent authorities with a view to ensuring that the prospectus is complete, consistent and comprehensible.
This paper, drawing upon the simple fact that disclosures are an ineffective mechanism to directly protect retail investors (who do not read them anyway), argues that more could be achieved in the direction of facilitating securities offerings across the EU while at the same time not diluting investor protection, if new rules for IPOs were introduced making the (reformed) prospectus regime optional under certain conditions. More precisely, issuers engaging in an IPO (i.e. in an offering in connection with a listing on a stock exchange) should be able to draft their prospectus either according to the required prospectus schedules and itemized contents, or according to a general standard requiring issuers to provide all information that a sophisticated investor would consider material in order to decide whether to buy shares in the IPO. In the latter case, no prior approval by the regulator would be required, but the following conditions should instead be met: (1) as is common practice already, the offer should be made via an underwriter and use a bookbuilding process; (2) as is currently only a best practice in Europe, the offering price for the retail investor component of the offer should be no higher than the price set via the bookbuilding process.
A similar regime would apply for non-exempt secondary offerings, while for securities placed by banks to their own clients, a similar regime would be made available, with due adaptations, for offerings exclusively targeted at clients of their asset management and advisory services, for which the suitability rule applies and provides better protection than issuer disclosures.
Jerome Greene Hall, Room 501
Brian R Cheffins, S J Berwin Professor of Corporate Law, University of Cambridge
Topic for Discussion: A Prospectus on "Transformation of the Public Company," a Leverhulme Fellowship funded project
Abstract: For the purposes of his project, Professor Cheffins will analyze how and why the U.S. public company, which has dominated the American economy since the beginning of the 20th century, has been transformed since an era of "managerial capitalism" that prevailed in the 1950s and 1960s. Particular emphasis will be placed on how changing market conditions, a reconfiguration of corporate governance arrangements and legal reforms have altered the manner in which publicly traded companies are run. Professor Cheffins’ project is scheduled to culminate in the publication of a book with Oxford University Press.
Jerome Greene Hall room 602
Mark J. Roe, David Berg Professor of Law, Harvard Law School
Topic for Discussion: "Taxing Banks Properly: The Next Regulatory Frontier"
Abstract: Since the 2008–2009 financial crisis regulators have sought to strengthen the banking system with higher capital requirements and other safety measures. Yet a core source of weakness, namely the tax system, subsidizes unsafe debt while taxing safer bank equity, making it less desirable. This tax distortion both weakens the banks’ corporate governance capacity and encourages the very activities that regulation is seeking to rein in. The magnitude of the safety benefit that could come from taxing banks properly rivals the size of all the post-crisis regulation to date. While the overall corporate tax pro-debt bias is well-known, it is particularly pernicious for banks, can be fixed for banks without restructuring the economy’s entire corporate tax system, and, if done perspicaciously, can be implemented nearly immediately.
Several reasons make this tax fix needed. First, debiasing the tax system for financial firms would make existing regulation more effective. Second, while the tax bias for debt has beneficial corporate governance features for industrial firms as higher debt levels induce greater managerial discipline, it lacks these mitigating benefits for banks; indeed, the tax bias seriously aggravates the excessive risk-taking incentives inside the banking organization. Third, the debt bias for banks does more than degrade banks oneby-one, as it does for industrial firms: by pushing banks into a more dangerous zone than it pushes most industrial firms, it weakens the entire financial system.
Bank taxation has become an issue in American presidential politics and is on the European reform agenda. We analyze here the best means to debias bank taxation—moving from a system-wide overhaul down to adjustments for the next dollar of equity raised and the next dollar of debt incurred—and examine the proposals now on the table in the United States and around the world. Most proposals respond to deep-seated antibank political impulses and some would seriously degrade financial safety. For example, political calls to surcharge the taxation of excess bank profits have the perverse result of weakening banks and putting the economy at risk, by making safe equity more expensive and unsafe debt relatively cheaper. While the best reforms are economy-wide, broad, and politically unobtainable, we outline, first, how and why the broad proposals have unanalyzed safety effects for the financial system that have not yet been brought forward. We then, second, bring forward sharply targeted reform ideas that have not previously been proposed or analyzed; they should reach much of the safety goal without being politically unattainable.
By triangulating the goals of financial regulation, the problems of bank corporate governance, and the ways bank taxation can be improved, we show how best to promote regulatory goals, improve bank governance, and tax banks wisely. The best trade-off of goals and practical possibilities is our targeted proposal of reducing the tax burdens on safe equity above the regulatory-required minimum and reducing the tax benefits of risky debt by eliminating the deduction above the risk-free return. The reform should be quite effective and, because it reduces tax on equity while raising it on debt, can be structured as a revenue-neutral reform. As such banks would have less reason to resist these reforms than they resist most mainstream command-and-control safety regulation.
Properly taxing banks is the next regulatory frontier for financial safety.
Jerome Greene Hall, Room 602
Ofer Eldar, PhD candidate, Yale School of Management
Topic for Discussion: "The Role of Social Enterprise and Hybrid Organizations"
Abstract: Recent years have brought remarkable growth in hybrid organizations that combine profit-seeking and social missions. Despite popular enthusiasm for such organizations, legal reforms to facilitate their formation and growth – including, in particular, legal forms for hybrid firms – have largely been ineffective. This shortcoming stems in large part from the lack of a theory that identifies the structural and functional elements that make some types of hybrid organizations more effective than others. In pursuit of such a theory, this article focuses on a large class of hybrid organizations that has been relatively successful in addressing development problems, such as increasing access to capital and improving employment opportunities. These organizations, which are commonly referred to as “social enterprises,” include microfinance institutions, firms that sell fair trade products, work integration firms, and low-cost sellers of essential goods and services such as eyeglasses, bed-nets and healthcare. The common characteristic of social enterprises is that they have a transactional relationship with their beneficiaries, who are either purchasers of the firms’ goods or services or suppliers of input (including labor) to the firm. The essence of the theory is that through these transactions, social enterprises gather information on their patron-beneficiaries’ ability to transact with commercial firms (e.g., workers’ skills, borrowers’ creditworthiness and consumers’ ability to pay). That information permits social enterprises to tailor the form and amount of subsidies to the specific needs of individual beneficiaries. This “measurement” function makes social enterprises more effective vehicles for allocating subsidies than more traditional donative organizations and other forms of hybrid organization, particularly firms that pursue corporate social responsibility policies. Legal hybrid forms should therefore focus on promoting firms that commit to transacting with disadvantaged groups, rather than firms with general social purposes that are difficult to ascertain.
Gabriel Rauterberg, Post-Doctoral Research Scholar, Program in the Law & Economics of Capital Markets Columbia Law School & Columbia Business School
Topic for Discussion: "Contracting within the Firm"
Abstract: Ever since Coase, transaction cost economics has posed a basic choice for how to organize production – firms or markets. In markets, decentralized parties contract with one another, while in firms, decisions are made on the basis of hierarchy and command. Over the last several decades, scholars have shown that the market is actually pervaded by relationships that support and sometimes supplant legal contracts. Yet the image of a firm’s internal organization as a matter of informality and authority has been left largely untouched.
I show that a surprising phenomenon exists: Firms that use negotiated agreements to organize their internal commercial activities and specialized adjudication to address any subsequent disputes, from inter-divisional boards, to mediation, to a firm’s own arbitral court. This phenomenon, which I call contracting within the firm, poses a puzzle, however. Why organize economic activity within a firm, only to reintroduce the tools of the market? Drawing on new developments in the theory of the firm, I identify several benefits. Most importantly, contracting within the firm can mitigate the agency problem that plagues hierarchies. Understanding intra-firm contracting offers many insights for theory and practice. It illuminates the basic choice between corporations and contracts in organizing production, while also informing how firms can approach a wide variety of internal governance issues.
Zenichi Shishido, Professor of Law, Hitotsubashi University, Graduate School of International Corporate Strategy and Senior Research Scholar in Law, Yale Law School
Topic for Discussion: "Japanese Corporate Governance from the Perspective of Family Firms"
Abstract: Corporate governance has been a hot issue across the world, especially since the Enron scandal and the Lehman shock. The Anglo-Saxon model (A-form), which focuses on monitoring management to maximize shareholder value using hostile takeovers and outside directors, is often criticized as either malfunctioning or short-sighted.
The Japanese model (J-form) differs markedly from the Anglo-Saxon model: there is stronger capacity for internal governance, there exist mechanisms to incentivize human capital providers such as “life-time” employment, there is greater internal promotion, and shareholder intervention can be excluded through cross-shareholding. These differences were once cited to explain Japan’s economic miracle, but were also cited as a major factor behind the lost decades of the 1990s and 2000s.
In fact, after the bubble economy of the mid-1980s, the ROAs of Japanese companies declined and were lower than that of Anglo-Saxon companies. Interestingly, Japanese family (J-family) firms have performed better than ordinary J-form firms, particularly after the economic bubble.
The objective of this paper is to answer the question: why have the performances of J-form firms been getting worse since the Japanese economic bubble in the mid-1980s, even while the performances of J-family firms have been better than that of non-family firms? This paper will then analyze the implications of comparing J-form and J-family firms on more general issues of corporate governance.
Chapter 2 will review the characteristics of J-form firms, particularly its most important aspect: internal governance. Chapter 3 will review the characteristics of A-form firms, specifically strong external governance and weak internal governance, and will draw three major distinctions between the J-form and A-form. Chapters 4 nd 5 will explain how the J-family firm is unique among J-form firms: Chapter 4 will focus on its use of the internal promotion rule, and Chapter 5 will focus on its Anglo-Saxon flavors. Chapter 6 will provide statistical data on the relative ROA of J-family firms and ordinary J-form firms that will show the supperior performance of the former. Chapter 7 will analyze the factors that allow J-family firms to perform better than ordinary J-form firms. Chapter 8 will conclude by drawing implications from comparing J-family and J-form firms on the issue of corporate governance.
Alessio Pacces, Professor of Law and Finance, Erasmus School of Law, Erasmus University of Rotterdam
Topic for Discussion: "Exit, Voice, and Loyalty from the Perspective of Shareholder Activism in Corporate Governance"
Abstract: This article discusses the policy response to hedge funds activism in corporate governance based on Hirschman’s classic: Exit, Voice and Loyalty. From that perspective, the article argues that hedge funds do not create concerns of loyalty because the arbiters of their activism are typically institutional investors that cannot exit strategically. Nevertheless, the voice activated by hedge funds can be excessive for a particular company.
Although the empirical evidence does not support the claim that the gains from hedge funds activism are short lived, the short-termism debate cannot shed much light on the desirability of shareholder activism. Neither theory nor empirical analyses can tell us whether the existence of hedge funds activism leads to some sort of short-termism and whether this is efficient for corporate governance. The real issue with activism is a conflict of entrepreneurship, namely between the opposing views of the activists and the incumbent management regarding how the target company should look like in the future. Leaving the choice between these views to institutional investors is not efficient for every company at every point in time.
Consequently, this article argues that regulation should enable individual companies to limit the impact of activism when this is efficient for them, while refraining from curbing the power of activists across the board. As revealed by the recent European experience, loyalty shares operate as dual-class shares in disguise. This outcome could be improved by allowing dual class recapitalizations explicitly, but subject to a majority of minority vote. This ‘sticky default’ solution would screen for the companies for which limiting the influence of activists is efficient and induce these companies to negotiate time-bound restrictions with institutional investors.
Albert H. Choi, Albert C. BeVier Research Professor of Law, University of Virginia School of Law
Topic for Discussion: "Facilitating Mergers and Acquisitions with Earnouts and Purchase Price Adjustments"
Abstract: This paper examines how post-closing contingent payment (PCP) mechanisms (such as earnouts and purchase price adjustments) can facilitate mergers and acquisitions transactions. The paper examines two informational environments: in the first, the seller has superior information about the value of her assets (private information setting) and in the second, the parties differ in their estimates on the value but are unable to overcome their difference (non-convergent priors setting). The paper also allows the parties to use either cash or the buyer’s stock as consideration. By conditioning payment on post-closing, verifiable information, PCPs can mitigate the problems of private information or non-convergent priors. In the private information setting, PCPs function as an imperfect verification mechanism (like a product warranty) and can lead to all parties using a PCP in a pooling equilibrium. In the non-convergent priors setting, PCPs can be used to satisfy different, non-converging beliefs. The paper also addresses the problems of limitations on the size of payment and post-closing incentives to maximize (or minimize) the PCP (particularly, earnout) payments. When such issues are a concern, the paper shows that (1) neither party may use a PCP (particularly an earnout); and (2) stock-based PCPs will generally work better than cash-based PCPs. Stock works better than cash because (1) its value is partially correlated with the value of the merged firm, thereby reducing the burden of having to structure a large contingent payment; and (2) with respect to post-closing moral hazard, the parties partly internalize the deadweight loss from engaging in earnings management (signal manipulation).
Jeffrey N. Gordon, Richard Paul Richman Professor of Law Columbia Law School
Topic for Discussion: "Shareholder Activism: the Triumph of Delaware's Board-Centered Model and the New Role for the Board of Directors"
Abstract: Professor Gordon will argue that Delaware jurisprudence should embrace shareholder activism because it focuses governance attention on the board of directors, the central objective of Delaware’s takeover law. This means rejecting the poison pill as a managerial defense measure against an activist campaign. Rather the focus should be on broadening the role of directors to become credible monitors and, if necessary, defenders of the firm’s business strategy and chosen time horizon. This is the next step in the evolution of directors’ role in the public firm.
Jodie Kirshner, Columbia Law School
Topic for Discussion: "Legal Implementation and Management of Infrastructure Finance Models: Trade-offs between Risk and Maturity"
Abstract: Many economies have difficulty financing infrastructure development: Bank loans of the long tenure necessary pose currency and maturity risks, and stable capital markets require robust legal foundations. Shortfalls in infrastructure finance, however, reduce the quality of life for citizens and inhibit the productive capacity of economies. Intermediate financing models therefore must sustain private finance in infrastructure projects in economies in which legal reforms remain ongoing. Previous studies have explored possible structures for these models. The studies, however, have not considered the legal infrastructure necessary to implement and support these financing techniques. This paper analyzes the tradeoffs that intermediate models for financing infrastructure present, in terms of augmenting the availability of long-term capital versus managing its risks. The paper explores potential fault lines in each model, and the necessary role for law in each. The Bank for International Settlements provided grant funding to support the research underlying this paper, and the Bank will use the research to inform its work related to infrastructure finance and advice to central banks.
Scott Baker, Professor of Law, Washington University in St. Louis School of Law
Topic for Discussion: "Information, Strategy, and Optimal Responses to Legal Uncertainty"
Abstract: We investigate how risk-neutral agents optimize their decisions that are subject to uncertain legal rules. We first address the settings where this choice depends only on the agent’s information about the nature of legal uncertainty under plausible assumptions about selective enforcement by a budget-constrained enforcement agency. We show that agents will choose to take uncertain positions, and that their positions will become stronger (more certainly legal) with an increase in the private benefit from taking the position as well as with a stochastic increase in the level of compliance demanded by the legal standard. Counter-intuitively, we also find that even risk-neutral agents prefer greater legal certainty. Next, we investigate a strategic setting where the resolution of the legal uncertainty for any given agent depends on what other agents in the market do. In other words, the enforcer consults “custom” in applying the legal rule. This setting produces an equilibrium in which an agent’s choice of what position to take depends on its expectations of other agents’ choices. We find that agents tend to cluster: aggressive agents become more conservative and vice versa. Finally, the strategic setting presents the enforcement agency with tradeoffs in selecting the enforcement targets.
Darius Palia, Professor and Thomas A. Renyi Chair in Banking Rutgers Business School
Topic for Discussion: "Short-Term Debt and Bank Risk"
Abstract: The extant literature has suggested that one of the main causes of the recent financial crisis has been the excessive use of short-term debt by financial institutions. Using a large sample of U.S. commercial banks we find that increases in repurchase agreements (repos) was recognized by external capital markets to increase bank risk in the pre-crisis period. No such effect is found for other forms of short-term debt such as commercial paper, brokered deposits and demand deposits. The importance of repos to increasing bank risk is consistent with the argument of Gorton and Metrick (2012a, b) who found a significant “run” in the repo market. In the crisis, we find a negative relationship between repos and bank risk. This is because good banks were able to continue funding their repos, whereas bad banks had to significantly decrease their repo funding. Counter to the notion that liquid assets provided a buffer against shocks, we find that banks’ were unable to reduce their risk either in the pre-crisis or crisis period.
Scott Hemphill Professor of Law, Columbia Law School
Topic for Discussion:Less Restrictive Alternatives in Antitrust and Constitutional Law
Abstract: Courts are often called upon to evaluate “mixed” conduct that has both harmful and beneficial effects. In antitrust and constitutional law, courts handle mixed conduct by comparing the action to a hypothesized alternative, and asking whether the alternative action is “less restrictive.” This less restrictive alternative (LRA) test is deployed widely in the rule of reason, merger review, strict scrutiny, and the proportionality review employed by constitutional democracies. Courts frequently limit their use of the LRA test to alternatives that are not only less restrictive but also equally effective. In other words, could the good have been achieved equally well with less bad?
In this Article, I offer a new account of the three functions served by the LRA test in antitrust and constitutional law: as a shortcut to avoid trading off the two values at stake, as a tool to smoke out the true state of affairs, and as a locus of balancing that considers both the pros and cons of the alternative. The shortcut approach helps to relieve an anxiety about engaging in an open tradeoff between the harm and the justification, by promising a result that avoids the tradeoff. Usually, however, it fails to deliver. The shortcut approach requires an equally effective LRA, but many real-world LRAs are less effective. As a tool of smoking out, moreover, the LRA test is of only limited use.
The test, far from avoiding balancing, often serves as a form of balancing. Courts embracing less effective LRAs are not making mistakes, but engaged in benefit-cost analysis. An LRA that is less effective is properly credited where the net effect is positive. An LRA limited to equally effective alternatives, even if attractive in constitutional law as a way to avoid balancing, is thus a poor fit for an antitrust law concerned with overall economic effects.
Sarath Sanga, Academic Fellow, Columbia Law School
Topic for Discussion: "The Contract Frontier: A Study of the Modern Joint Venture"
Abstract: How can corporations be competitors and partners at the same time? This is the dilemma of the modern joint venture. Joint ventures create an intrinsic fiduciary conflict because agents of each corporation owe a duty of undivided loyalty both to their own entities and—via the venture—to each other’s.
This paper presents a theory of how the modern joint venture resolves this conflict through contract. I argue that the key solution lies in organizing the joint venture’s business opportunities by: (1) creating a separate joint venture entity and (2) establishing a covenant not to compete. The covenant not to compete delineates the jointly-owned business opportunities from the opportunities that either co-venturer may independently pursue. It does this by replacing the default fiduciary standard of loyalty with a more precise fiduciary rule. The covenant not to compete also prohibits both partners from individually participating in the joint venture market. Instead, the joint venture market and all its opportunities are assigned to a separate joint venture entity. The joint venture entity quarantines the opportunities by taking ownership over the opportunities away from the co-venturers; it also solves the problem of “divided” loyalties because the entity has its own agents that are loyal to the entity and not to either co-venturer. The entity and the covenant not to compete together form a single organizational device: the modern joint venture.
I analyze this device in the context of a joint venture between The Boeing Company and Lockheed Martin, and show how the aerospace industry as a whole leverages it to support an immense network of joint ventures.
Emiliano Catan, Assistant Professor of Law, New York University School of Law
Marcel Kahan, George T. Lowy Professor of Law, New York University School of Law
Topic for Discussion: "The Law and Finance of Anti-Takeover Statutes"
Abstract: Lawyers and financial economists have fundamentally different views of anti-takeover statutes. While corporate lawyers and academics generally dismiss these statutes as irrelevant, economists study them empirically and find that they – and hence the threat of a takeover – affect firm and managerial behavior. This article seeks to bridge the divide between the law and the finance approach to antitakeover statutes. We first explain why these statutes, as used by financial economists, are not a proper metric of the takeover threat facing a firm. We then review three empirical studies published in leading finance journals. For each study, we show that the results are affected by omitted variables, large scale coding errors, or improper specifications. When corrected for these problems, the associated between anti-takeover statutes and the hypothesized effect disappeared. Our paper calls into doubt most of the understanding of the effect of takeover threat, which is based to a large extent on studies of antitakeover statutes.