This Article argues that the conventional wisdom about corporate raiders and activist hedge funds—raiders break things, and activists fix them—is wrong. Because activists have a higher risk of mistargeting—mistakenly shaking things up at firms that only appear to be underperforming—they are much more likely than raiders to destroy value and, ultimately, social wealth. As corporate outsiders who challenge the incompetence or disloyalty of incumbent management, raiders and activists play similar roles in reducing “agency costs” at target firms. The difference between them comes down to a simple observation about their business models: raiders buy entire companies, while activists take minority stakes. This means that raiders are less likely to mistarget firms underperforming by only a slight margin, and they are less able to shift the costs of their mistakes onto other shareholders. The differences in incentives between raiders and activists only increase after the acquisition of their stake. Raiders have unrestricted access to nonpublic information after acquiring ownership of a target company, which allows them to look under the hood to determine whether changing the target’s business strategy is truly warranted. Activists, by contrast, have limited information and face structural conflicts of interest that impair their ability to objectively evaluate what’s best for the target company. This insight has profound implications for corporate law and policy. Delaware and federal law alike have focused on building walls to keep raiders outside the gates, but they ignore the real threat—shareholder activists—that are already inside. We propose reforms to both state and federal law that would equalize the regulation of raiders and activists.
{"title":"Raiders, Activists, and the Risk of Mistargeting","authors":"Z. Goshen, Reilly S. Steel","doi":"10.2139/ssrn.3945764","DOIUrl":"https://doi.org/10.2139/ssrn.3945764","url":null,"abstract":"This Article argues that the conventional wisdom about corporate raiders and activist hedge funds—raiders break things, and activists fix them—is wrong. Because activists have a higher risk of mistargeting—mistakenly shaking things up at firms that only appear to be underperforming—they are much more likely than raiders to destroy value and, ultimately, social wealth. As corporate outsiders who challenge the incompetence or disloyalty of incumbent management, raiders and activists play similar roles in reducing “agency costs” at target firms. The difference between them comes down to a simple observation about their business models: raiders buy entire companies, while activists take minority stakes. This means that raiders are less likely to mistarget firms underperforming by only a slight margin, and they are less able to shift the costs of their mistakes onto other shareholders. The differences in incentives between raiders and activists only increase after the acquisition of their stake. Raiders have unrestricted access to nonpublic information after acquiring ownership of a target company, which allows them to look under the hood to determine whether changing the target’s business strategy is truly warranted. Activists, by contrast, have limited information and face structural conflicts of interest that impair their ability to objectively evaluate what’s best for the target company. This insight has profound implications for corporate law and policy. Delaware and federal law alike have focused on building walls to keep raiders outside the gates, but they ignore the real threat—shareholder activists—that are already inside. We propose reforms to both state and federal law that would equalize the regulation of raiders and activists.","PeriodicalId":431402,"journal":{"name":"LSN: Securities Law: U.S. (Topic)","volume":"52 s34","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-10-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"120839406","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper reviews the academic literature that analyzes securities regulation from an economic perspective. It begins by describing the institutional foundations of securities law in the U.S. and distinguishing securities regulation from the private law of contracts, property, and fraud. Section 2 discusses the theoretical literature on mandatory versus voluntary disclosure in securities markets, focusing on information asymmetry and agency problems as justifications for mandatory disclosure. Section 3 surveys empirical work on the efficacy of actual mandatory disclosure rules. The remaining sections describe particular aspects of the U.S. regulatory system, including the regulation of public offerings, publicly-traded companies, trading markets, securities fraud, insider trading, market manipulation, and mutual funds and other collective investment vehicles, and surveys important theoretical and empirical work on each. The paper is intended to offer both institutional background and a summary of key research findings that may provide useful starting points for future research.
{"title":"The Economics of Securities Regulation: A Survey","authors":"P. Mahoney","doi":"10.1561/0500000061","DOIUrl":"https://doi.org/10.1561/0500000061","url":null,"abstract":"This paper reviews the academic literature that analyzes securities regulation from an economic perspective. It begins by describing the institutional foundations of securities law in the U.S. and distinguishing securities regulation from the private law of contracts, property, and fraud. Section 2 discusses the theoretical literature on mandatory versus voluntary disclosure in securities markets, focusing on information asymmetry and agency problems as justifications for mandatory disclosure. Section 3 surveys empirical work on the efficacy of actual mandatory disclosure rules. The remaining sections describe particular aspects of the U.S. regulatory system, including the regulation of public offerings, publicly-traded companies, trading markets, securities fraud, insider trading, market manipulation, and mutual funds and other collective investment vehicles, and surveys important theoretical and empirical work on each. The paper is intended to offer both institutional background and a summary of key research findings that may provide useful starting points for future research.","PeriodicalId":431402,"journal":{"name":"LSN: Securities Law: U.S. (Topic)","volume":"34 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-08-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121236072","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The autonomous vehicle (“AV”) industry faces the following ethical question: “How do we know when our AV technology is safe enough to deploy at scale?” The search for an answer to this question is the “AV Problem.” This essay examines that question through the lens of the July 15, 2021 filing on Form S-4 with the Securities and Exchange Commission in the going public transaction for Aurora Inventions, Inc. The filing reveals that successful implementation of Aurora’s business plan in the long term depends on the truth of the following proposition: A vehicle controlled by a machine driver is safer than a vehicle controlled by a human driver (the “Safety Proposition”). In a material omission for which securities law liability may attach, the S-4 fails to state Aurora’s position on deployment: will Aurora delay deployment until such time as it believes the Safety Proposition is true to a reasonable certainty or will it deploy at scale earlier in the hope that increased current losses will be offset by anticipated future safety gains? The Safety Proposition is a statement about physical probability which is either true or false. For success, AV companies need the public to believe the Safety Proposition, yet belief is not the same as truth. The difference between truth and belief creates tension in the S-4 because the filing both fosters a belief in the Safety Proposition while at the same time making clear there is insufficient evidence to support the truth of the Safety Proposition. A moral hazard results when financial pressures push for early deployment of AV systems before evidence shows that the Safety Proposition is true to a reasonable certainty. This problem is analyzed by comparison with the famous trolley problem in ethics and consideration of corporate governance techniques which an AV company might use to ensure the integrity of its decision process for deployment. The AV industry works to promote belief in the safety proposition in the hope that the public will accept that AV technology has benefits, thus avoiding the need to confront the truth of the Safety Proposition directly. This hinders a meaningful public debate about the merits and timing of deployment of AV technology, raising the question of whether there is a place for meaningful government regulation.
{"title":"Autonomous Vehicles, Moral Hazards & the \"AV Problem\"","authors":"William H. Widen","doi":"10.2139/ssrn.3902217","DOIUrl":"https://doi.org/10.2139/ssrn.3902217","url":null,"abstract":"The autonomous vehicle (“AV”) industry faces the following ethical question: “How do we know when our AV technology is safe enough to deploy at scale?” The search for an answer to this question is the “AV Problem.” This essay examines that question through the lens of the July 15, 2021 filing on Form S-4 with the Securities and Exchange Commission in the going public transaction for Aurora Inventions, Inc. \u0000 \u0000The filing reveals that successful implementation of Aurora’s business plan in the long term depends on the truth of the following proposition: A vehicle controlled by a machine driver is safer than a vehicle controlled by a human driver (the “Safety Proposition”). \u0000 \u0000In a material omission for which securities law liability may attach, the S-4 fails to state Aurora’s position on deployment: will Aurora delay deployment until such time as it believes the Safety Proposition is true to a reasonable certainty or will it deploy at scale earlier in the hope that increased current losses will be offset by anticipated future safety gains? \u0000 \u0000The Safety Proposition is a statement about physical probability which is either true or false. For success, AV companies need the public to believe the Safety Proposition, yet belief is not the same as truth. The difference between truth and belief creates tension in the S-4 because the filing both fosters a belief in the Safety Proposition while at the same time making clear there is insufficient evidence to support the truth of the Safety Proposition. \u0000 \u0000A moral hazard results when financial pressures push for early deployment of AV systems before evidence shows that the Safety Proposition is true to a reasonable certainty. This problem is analyzed by comparison with the famous trolley problem in ethics and consideration of corporate governance techniques which an AV company might use to ensure the integrity of its decision process for deployment. The AV industry works to promote belief in the safety proposition in the hope that the public will accept that AV technology has benefits, thus avoiding the need to confront the truth of the Safety Proposition directly. This hinders a meaningful public debate about the merits and timing of deployment of AV technology, raising the question of whether there is a place for meaningful government regulation.","PeriodicalId":431402,"journal":{"name":"LSN: Securities Law: U.S. (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-08-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131352316","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Abstract Does enhanced regulatory transparency facilitate alignment of private and public enforcement? Utilizing the SEC's 2004 decision to publicly disclose its comment letters, we explore the actions of the SEC and shareholder litigants. We find the two parties converge more on enforcement targets after the public disclosure. The increased alignment is attributable to public scrutiny of SEC oversight enhancing regulator incentives and reducing regulatory capture, and to shareholder plaintiffs gaining information previously accessible only by regulators, enabling litigants to identify cases with “merit.” These findings suggest regulatory transparency enhances the complementarity of public and private enforcement, potentially improving enforcement outcomes.
{"title":"Regulatory transparency and the alignment of private and public enforcement: Evidence from the public disclosure of SEC comment letters","authors":"Amy P. Hutton, Susan Shu, Xin Zheng","doi":"10.2139/ssrn.3684840","DOIUrl":"https://doi.org/10.2139/ssrn.3684840","url":null,"abstract":"Abstract Does enhanced regulatory transparency facilitate alignment of private and public enforcement? Utilizing the SEC's 2004 decision to publicly disclose its comment letters, we explore the actions of the SEC and shareholder litigants. We find the two parties converge more on enforcement targets after the public disclosure. The increased alignment is attributable to public scrutiny of SEC oversight enhancing regulator incentives and reducing regulatory capture, and to shareholder plaintiffs gaining information previously accessible only by regulators, enabling litigants to identify cases with “merit.” These findings suggest regulatory transparency enhances the complementarity of public and private enforcement, potentially improving enforcement outcomes.","PeriodicalId":431402,"journal":{"name":"LSN: Securities Law: U.S. (Topic)","volume":"2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129260490","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Abstract We investigate the effect of the “7% solution”—the fact that underwriters in the U.S. charge a 7% spread to most IPOs between $20 million and $100 million in size—on the ensuing pricing of the offerings. Our identification exploits the variation in spreads that is due to distinct kinks in the relation between spread and offer size at these two thresholds. We find the spread positively influences underpricing but also the offer-price adjustment from the filing range's midpoint. Our evidence indicates the spread influences the aftermarket price, suggesting underwriters can shape, not merely discover, investor valuations.
{"title":"The '7% Solution' and IPO (Under)Pricing","authors":"Walid Y. Busaba, Felipe Restrepo","doi":"10.2139/ssrn.3623433","DOIUrl":"https://doi.org/10.2139/ssrn.3623433","url":null,"abstract":"Abstract We investigate the effect of the “7% solution”—the fact that underwriters in the U.S. charge a 7% spread to most IPOs between $20 million and $100 million in size—on the ensuing pricing of the offerings. Our identification exploits the variation in spreads that is due to distinct kinks in the relation between spread and offer size at these two thresholds. We find the spread positively influences underpricing but also the offer-price adjustment from the filing range's midpoint. Our evidence indicates the spread influences the aftermarket price, suggesting underwriters can shape, not merely discover, investor valuations.","PeriodicalId":431402,"journal":{"name":"LSN: Securities Law: U.S. (Topic)","volume":"6 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131438026","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The COVID-19 pandemic presented wide-ranging challenges for businesses. Not the least of these is compliance with the federal securities laws, including the prohibition – most notably under SEC Rule 10b-5 – on materially deceptive statements made to the public. Both the SEC, in its role as enforcer of the law, and private parties, seeking to represented classes of aggrieved investors, have filed complaints asserting that corporations and others have engaged in deception of investors regarding matters pertaining to COVID-19. Some of these claims relate to disclosures regarding testing kits for the virus as well as development of vaccines. Other complaints allege faulty disclosure on the effect of the pandemic on the market for a company’s products and services that are not themselves related to the pandemic, such as claims against cruise lines that suspended operations. This article presents the legal framework for claims based on Rule 10b-5, SEC guidance on how COVID-19 affects compliance with disclosure requirements for public companies, and the issues that have emerged in the claims already filed This analysis demonstrates that almost any public reporting company faces the risk of inadequate disclosure and the temptation to withhold or misstate material facts in a time of financial stress.
{"title":"COVID-19 and Rule 10b-5","authors":"A. Horwich","doi":"10.2139/SSRN.3790657","DOIUrl":"https://doi.org/10.2139/SSRN.3790657","url":null,"abstract":"The COVID-19 pandemic presented wide-ranging challenges for businesses. Not the least of these is compliance with the federal securities laws, including the prohibition – most notably under SEC Rule 10b-5 – on materially deceptive statements made to the public. Both the SEC, in its role as enforcer of the law, and private parties, seeking to represented classes of aggrieved investors, have filed complaints asserting that corporations and others have engaged in deception of investors regarding matters pertaining to COVID-19. Some of these claims relate to disclosures regarding testing kits for the virus as well as development of vaccines. Other complaints allege faulty disclosure on the effect of the pandemic on the market for a company’s products and services that are not themselves related to the pandemic, such as claims against cruise lines that suspended operations. \u0000 \u0000This article presents the legal framework for claims based on Rule 10b-5, SEC guidance on how COVID-19 affects compliance with disclosure requirements for public companies, and the issues that have emerged in the claims already filed This analysis demonstrates that almost any public reporting company faces the risk of inadequate disclosure and the temptation to withhold or misstate material facts in a time of financial stress.","PeriodicalId":431402,"journal":{"name":"LSN: Securities Law: U.S. (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-02-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129569949","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Although it is well understood that activist shareholders challenge management, they can also serve as a shield. This Article describes “validation capital,” which occurs when a bloc holder’s—and generally an activist hedge fund’s—presence protects management from shareholder interference and allows management’s pre-existing strategy to proceed uninterrupted. When a sophisticated bloc holder with a large investment and the ability to threaten management’s control chooses to vouch for management’s strategy after vetting it, this support can send a credible signal to the market that protects management from disruption. By protecting a value-creating management strategy that might otherwise be misjudged, providers of validation capital benefit all shareholders, including themselves. However, validation capital may also have a dark side: in theory, it could be used to entrench under-performing management from outside interference that would benefit the company and its shareholders. In this scenario, the bloc holder acts as a hired “bodyguard” who receives a side payment in exchange for the promise to ward off other investors. We theorize that legal and market forces do much to constrain the corrupt form of validation capital, and our empirical study of hedge fund activism events from 2015 offers evidence in support of our theory. We find that although side payments from corporate management to hedge funds are relatively common, they tend to be small, and not of the magnitude necessary to induce corruption of the sophisticated funds capable of generating a persuasive signal.
{"title":"Validation Capital","authors":"Alon Brav, D. S. Lund, Edward B. Rock","doi":"10.2139/ssrn.3786161","DOIUrl":"https://doi.org/10.2139/ssrn.3786161","url":null,"abstract":"Although it is well understood that activist shareholders challenge management, they can also serve as a shield. This Article describes “validation capital,” which occurs when a bloc holder’s—and generally an activist hedge fund’s—presence protects management from shareholder interference and allows management’s pre-existing strategy to proceed uninterrupted. When a sophisticated bloc holder with a large investment and the ability to threaten management’s control chooses to vouch for management’s strategy after vetting it, this support can send a credible signal to the market that protects management from disruption. By protecting a value-creating management strategy that might otherwise be misjudged, providers of validation capital benefit all shareholders, including themselves. However, validation capital may also have a dark side: in theory, it could be used to entrench under-performing management from outside interference that would benefit the company and its shareholders. In this scenario, the bloc holder acts as a hired “bodyguard” who receives a side payment in exchange for the promise to ward off other investors. We theorize that legal and market forces do much to constrain the corrupt form of validation capital, and our empirical study of hedge fund activism events from 2015 offers evidence in support of our theory. We find that although side payments from corporate management to hedge funds are relatively common, they tend to be small, and not of the magnitude necessary to induce corruption of the sophisticated funds capable of generating a persuasive signal.","PeriodicalId":431402,"journal":{"name":"LSN: Securities Law: U.S. (Topic)","volume":"22 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127643808","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Share lending allows passive investors to generate revenue from a decline in portfolio value. When an active mutual fund exits a portfolio firm, passive index funds belonging to the same fund family raise the cost of borrowing the firm’s shares for short selling. To identify supply-side shifts, I exploit changes in the identity of active managers exogenous to within-portfolio variation in the informational sensitivity of share lending costs. The exercise of market power is pronounced in value lending programs targeting hard-to-borrow securities. Share lenders with market power capture most of the surplus arising from the price decline.
{"title":"Passive Exit","authors":"Joshua Mitts","doi":"10.2139/ssrn.3716249","DOIUrl":"https://doi.org/10.2139/ssrn.3716249","url":null,"abstract":"Share lending allows passive investors to generate revenue from a decline in portfolio value. When an active mutual fund exits a portfolio firm, passive index funds belonging to the same fund family raise the cost of borrowing the firm’s shares for short selling. To identify supply-side shifts, I exploit changes in the identity of active managers exogenous to within-portfolio variation in the informational sensitivity of share lending costs. The exercise of market power is pronounced in value lending programs targeting hard-to-borrow securities. Share lenders with market power capture most of the surplus arising from the price decline.","PeriodicalId":431402,"journal":{"name":"LSN: Securities Law: U.S. (Topic)","volume":"44 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-12-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131351032","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
A company selling securities only to a category of buyers called accredited investors under the terms of a regulation of the Securities and Exchange Commission, Rule 506 of Regulation D, has no legal obligation to provide any information to prospective buyers. Nonetheless, anecdotal information indicated that, in practice, issuers have usually provided some amount of disclosure. The possibility that issuers actually supplied disclosure to accredited investors in private transactions when they had no legal obligation to do so suggested a need for empirical research. Did issuers provide disclosure to accredited investors in a few or many private offerings, and, if so, in what circumstances and in what detail was disclosure provided? For information on these topics, I interviewed a group of lawyers who represented clients in a large number of private securities transactions in which accredited investors were the only buyers. The practitioners reported that issuers nearly always provided some form of disclosure to accredited investors. The amount of disclosure depended on several factors, such as the participation of a financial intermediary in the transaction, the experience and sophistication of the buyers, and the issuer’s resources and stage of development. In some types of transactions, issuers provided a full disclosure document resembling a prospectus in a registered offer. In other types, the quantity of disclosure was much smaller.
根据美国证券交易委员会(securities and Exchange Commission)法规D第506条的规定，一家公司只向被称为合格投资者的一类买家出售证券，没有向潜在买家提供任何信息的法律义务。尽管如此，坊间消息显示，在实践中，发行人通常会提供一定程度的披露。发行人在没有法律义务的情况下，在私人交易中向合格投资者披露信息，这种可能性表明有必要进行实证研究。发行人是否在少数或许多私募发行中向合格投资者披露了信息?如果有，披露的情况和细节是什么?为了获得有关这些主题的信息，我采访了一群律师，他们代表客户参与了大量的私人证券交易，在这些交易中，合格投资者是唯一的买家。从业人员报告说，发行人几乎总是向合格投资者提供某种形式的信息披露。披露的数量取决于几个因素，比如金融中介机构在交易中的参与程度、买家的经验和老练程度、发行人的资源和发展阶段。在某些类型的交易中，发行人提供了一份完整的披露文件，类似于注册要约中的招股说明书。在其他类型中，披露的数量要少得多。
{"title":"Evidence on the Use of Disclosure Documents in Private Securities Offerings to Accredited Investors","authors":"Andrew N. Vollmer","doi":"10.2139/ssrn.3719283","DOIUrl":"https://doi.org/10.2139/ssrn.3719283","url":null,"abstract":"A company selling securities only to a category of buyers called accredited investors under the terms of a regulation of the Securities and Exchange Commission, Rule 506 of Regulation D, has no legal obligation to provide any information to prospective buyers. Nonetheless, anecdotal information indicated that, in practice, issuers have usually provided some amount of disclosure. The possibility that issuers actually supplied disclosure to accredited investors in private transactions when they had no legal obligation to do so suggested a need for empirical research. Did issuers provide disclosure to accredited investors in a few or many private offerings, and, if so, in what circumstances and in what detail was disclosure provided? For information on these topics, I interviewed a group of lawyers who represented clients in a large number of private securities transactions in which accredited investors were the only buyers. The practitioners reported that issuers nearly always provided some form of disclosure to accredited investors. The amount of disclosure depended on several factors, such as the participation of a financial intermediary in the transaction, the experience and sophistication of the buyers, and the issuer’s resources and stage of development. In some types of transactions, issuers provided a full disclosure document resembling a prospectus in a registered offer. In other types, the quantity of disclosure was much smaller.","PeriodicalId":431402,"journal":{"name":"LSN: Securities Law: U.S. (Topic)","volume":"28 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115721009","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
P. Davies, Susan Emmenegger, G. Ferrarini, K. Hopt, A. Opalski, Alain Pietrancosta, Andrés Recalde Castells, Markus Roth, M. Schouten, Rolf Skog, Martin Winner, E. Wymeersch
In 2017 the European Union adopted amendments to the Shareholder Rights Directive enacted a decade earlier. Among the changes was a new Article 9c dealing with the topic of related party transactions (RPT). This paper analyses how that new provision has been implemented in a range of Member States and assesses its impact on the prior laws of those states.Compared with the initial proposals of the European Commission, Article 9c as adopted was considerably watered down. Allegedly inspired by the related party provisions of the UK Listing Rules, those proposals mandated disclosure at the 1% level of significance (measured typically by the value of the company’s assets), accompanied by a fairness opinion, and approval by the independent shareholders (majority-of-the-minority (MOM)) at the 5% level). As enacted, MSS were given a choice of MOM or board approval and freedom to set the criterion for triggering the approval requirement. The same freedom as to trigger was accorded to the MSS in relation to disclosure and the requirement for a fairness opinion was dropped.In consequence, MSS had a wide range of choices to make at the transposition stage. A major focus of this piece is an analysis of the choices actually made by the MSS (Part 3). This provides a basis for the assessment in Part 4 of the impact of Article 9c in moving the laws of the MSS towards a more demanding orientation. There are three main conclusions. First, the requirements of Article 9c for approval of RPT had limited impact. No MS which did not already have MOM adopted it in the transposition process. As for board approval, which was already widespread in the laws of the MSS, it is doubtful whether the transposition of the Article ensured the independence of the board members called upon to approve the transaction. Second, it is likely that the most important change required by the Article was public disclosure, even if shorn of the fairness opinion. The adverse impact of disclosure on the company’s share price is potentially capable of reducing the levels of wholly one-sided RPT. Public disclosure, although already required by the laws of some MSS, was not widespread.Third, and more optimistic, there is evidence that the process of transposing Article 9c caused MSS to review their laws on RPT more generally and, in some MSS, this provided an opportunity for reformers to secure changes beyond those required by the Article itself. This might be termed the “catalysing” effect of transposition. The outcome in any particular MS turns on the balance of power between reformers and conservatives, but transposition gives reformers the opportunity to make a case which might otherwise not have been available to them.
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