Blue Sky 2018-2019

Topic: Why Law Firms Collapse

• John Morley, Professor of Law, Yale Law School

Location: Jerome Greene Hall, Room 546

Abstract: Law firms don’t just go bankrupt—they collapse. Like Dewey & LeBoeuf, Heller Ehrman, and Bingham McCutchen, law firms often go from apparent health to liquidation in a matter of months or even days. Almost no large law firm has ever managed to reorganize its debts in bankruptcy and survive. This pattern is puzzling, because it has no parallel among ordinary businesses. Many businesses go through long periods of financial distress and many even file for bankruptcy. But almost none collapse with the extraordinary force and finality of law firms. Why? I argue that law firms are fragile because they are owned by their partners, rather than by investors. Partner ownership creates the conditions for a spiraling cycle of withdrawals that resembles a run on the bank. As the owners of the business, the partners of a law firm are the ones who suffer declines in profits and who have to disgorge their compensation in the event the firm becomes insolvent. So if one partner leaves and damages the firm, it is the remaining partners who bear the loss. Each partner’s departure thus has the potential to worsen conditions for those who remain, meaning that as each partner departs, the others become more likely to leave as well, eventually producing an accelerating race for the exists bank. This kind of spiraling withdrawal is sometimes thought to be an unavoidable consequence of financial distress. But if law firms were not owned by their partners, this would not happen. Indeed, the only large law firm in the history of the common law world that has ever survived a prolonged insolvency is also one of the only large law firms that has ever been owned by investors. These insights have extensive implications for how we understand law firms and corporate organization more generally.

Topic: Fiduciary Obligations in the Presence of Multiple Classes of Stock (co-authored with Sarath Sanga)

• Eric Talley, Isidor and Seville Sulzbacher Professor of Law & Co-Director, Millstein Center for Global Markets and Corporate Ownership

Location: Jerome Greene Hall, Room 502

Abstract: This paper develops a game theoretic framework to study the increasingly common conflict between common and preferred shareholders regarding whether to liquidate the firm or continue. In our model, common tend to inefficiently continue while preferred tend to inefficiently liquidate. Taking a cue from recent case law, we explore whether it is possible to use damages (for either “wrongful exit” or “wrongful continuation”) to align the interests of common and preferred in maximizing firm value. We show that there always exists an efficient damages rule if the interests of preferred shareholders control the exit/continue decision. When common control the decision, however, an efficient damages regime may either fail to exist or may require supra-compensatory damages. Our framework also suggests that ex ante contracting need not give rise to an efficient damages rule, particularly if investment capital is relatively scarce. Our findings have implications for the ongoing debate about how to assign fiduciary duties and rights within privately held firms with multiple classes of stock.

Topic: Stickiness of Contractual Gaps: Explaining the Lack of Forum Selection Clauses in Commercial Agreements (To view the paper, please contact the author)

• Julian Nyarko, Fellow, Ira M. Millstein Center for Global Markets & Corporate Ownership, Columbia Law School

Location: Jerome Greene Hall, Room 546

Abstract: Both economic and legal theory assumes that sophisticated parties routinely write agreements that maximize their joint surplus. But more recent studies analyzing covenants in corporate and government bond agreements have shown that many contract provisions are highly path dependent and “sticky,” with future covenants only rarely improving upon previous ones. This Article demonstrates that the stickiness-hypothesis explains the striking lack of choice-of-forum provisions in commercial contracts, which are absent in more than half of all material agreements reported to the SEC. When drafting these agreements, external counsel relies heavily on templates and whether or not a contract includes a forum selection clause is almost exclusively driven by the template that is used to supply the first draft. There is no evidence to suggest that counsel negotiates over the inclusion of choice-of-forum provisions, nor that law firm templates are revised in response to changes in the costs and benefits of incomplete contracting. Together, the findings reveal a distinct apathy with respect to forum choice among transactional lawyers that perpetuates the existence of contractual gaps. The persistence of these gaps suggests that default rules may have significantly greater implications for the final allocation of the contractual surplus than is assumed under traditional theory.

Topic: Law & Macroeconomics: Legal Remedies to Recessions (Introduction)

• Yair Listokin, Shibley Family Fund Professor of Law, Yale Law School

Location: Jerome Greene Hall, Room 646

Book Description: After the economic crisis of 2008, private-sector spending took nearly a decade to recover. Yair Listokin thinks we can respond more quickly to the next meltdown by reviving and refashioning a policy approach whose proven success is too rarely acknowledged. Harking back to New Deal regulatory agencies, Listokin proposes that we take seriously law’s ability to function as a macroeconomic tool, capable of stimulating demand when needed and relieving demand when it threatens to overheat economies. Listokin makes his case by looking at both positive and cautionary examples, going back to the New Deal and including the Keystone Pipeline, the constitutionally fraught bond-buying program unveiled by the European Central Bank at the nadir of the Eurozone crisis, the ongoing Greek crisis, and the experience of U.S. price controls in the 1970s. History has taught us that law is an unwieldy instrument of macroeconomic policy, but Listokin argues that under certain conditions it offers a vital alternative to the monetary and fiscal policy tools that stretch the legitimacy of technocratic central banks near their breaking point while leaving the rest of us waiting and wallowing.

Topic: The Strategies of Anticompetitive Common Ownership

• Scott Hemphill, Professor of Law at NYU Law School
• Marcel Kahan, George T. Lowry Professor of Law at NYU Law School

Location: Jerome Greene Hall, Room 602

Abstract: Recent scholarship considers the potential anticompetitive effects when institutional investors hold substantial stakes in competing firms. Empirical evidence reporting that common concentrated owners (“CCOs”) are associated with higher prices and lower output poses a sharp challenge to antitrust orthodoxy and corporate governance scholarship. We identify and examine the causal mechanisms that might link common ownership to higher prices. We distinguish potential mechanisms along three dimensions: whether the mechanism produces conflict with noncommon owners by inducing actions that raise CCO portfolio value at the expense of firm value; whether a mechanism targets specific firm actions as opposed to affecting firm activities across-the-board; and whether the mechanism is active (rather than passive), in the sense that the CCO undertakes some act in furtherance of its strategy, such as communicating with management or voting. We consider whether each mechanism is tested by the existing empirical evidence, and whether the mechanism is plausible—that is, feasible, effective, and in a CCO’s interest. Our main conclusion is that, for most proposed mechanisms, there is no significant evidence suggesting that institutional CCOs employ them, no strong theoretical basis for believing that they could and would want to do so, or both. The mechanism that is most consistent with the empirical evidence and most plausibly employed by institutional CCOs is selective omission: to press for firm actions that increase both firm value and the CCO’s portfolio value, while remaining passive where the two conflict. We make three major points. First, several mechanisms emphasized in the literature are not, in fact, empirically tested. Of particular interest, the leading empirical studies are limited to mechanisms that are conflictual and targeted. Second, some mechanisms are infeasible or else ineffective in raising portfolio value. Third, because most institutional investors have only weak incentives to increase portfolio value, it is not in their economic interest to pursue mechanisms that carry significant reputational or legal liability risks. Our analysis has several important implications. First, any serious analysis of anticompetitive effects must pay careful attention to systematic differences in the incentives of different investor types. Second, CCOs often have procompetitive effects, particularly when they are invested in some but not all firms in an industry. Third, a convincing case for broad reform has not been made. We advocate a searching examination of the steps actually taken by CCOs and firms—the who, where, when and how predicted by the most plausible mechanisms.

Topic: Related Party Transactions in Commonwealth Asia: Complicating the Comparative Paradigm (co-authored with Umakanth Varottil)

• Dan Puchniak, Short Term International Visiting Associate Professor of Law (Spring 2019), Columbia Law School and Associate Professor, National University of Singapore

Location: Jerome Greene Hall, Room 602

Abstract: The World Bank’s influential Doing Business Report (DBR) has been a key platform for the American-driven dissemination of global norms of good corporate governance. A prominent part of the DBR is the related party transactions (RPT) index, which ranks 190 jurisdictions from around the world on the quality of their laws regulating RPTs. According to the RPT Index, the regulation of RPTs in Commonwealth Asia’s most important economies is stellar. In the 2018 RPT Index, Singapore ranked 1st, Hong Kong and Malaysia tied for 3rd, and India came in at 20th. However, despite the uniformly high RPT Index scores in all of Commonwealth Asia’s most important economies, empirical, case-study, and anecdotal evidence overwhelmingly suggests that there are in practice significant inter-jurisdictional and intra-jurisdictional differences in the actual function and regulation of RPTs in Commonwealth Asia. In this article, we assert that the conspicuous gap between what the RPT Index suggests should be occurring and what is actually occurring in Commonwealth Asia exists because it fails to capture the complexity of RPTs in three respects, which we term: (1) regulatory complexity; (2) shareholder complexity; and, (3) normative complexity. First, it appears that the RPT Index overly emphasizes the role played by a jurisdiction’s formal corporate and securities laws in determining the effectiveness of its RPT regulation, and it fails to pay due regard to its corporate culture and rule of law norms in determining the efficiency of its RPT regulation. Second, the RPT Index erroneously assumes that controlling shareholders are a homogeneous group driven by similar incentives. Third, the general assumption that RPTs per se are evidence of defective corporate governance and that stricter regulation of RPTs consequently equates to “good law” is erroneous. Demonstrating the frailties of the RPT Index is important in practice because jurisdictions – especially developing ones – commonly look to the DBR and its indices when reforming their laws. In addition, the RPT Index is built on some of the most influential research in the field of comparative corporate law, which makes our challenge to the validity of the RPT Index academically significant.

Topic: Golden Parachutes and the Limits of Shareholder Voting (co-authored with Andrew Lund & Robert Schonlau)

• Albert Choi, Visiting Professor of Law (Spring 2019), Columbia Law School

Location: Jerome Greene Hall, Room 602

Abstract: With the passage of Dodd-Frank Act in 2010, Congress attempted to constrain executive compensation triggered by change-in-control (golden parachute) payments by giving shareholders the right to approve or disapprove the payments on an advisory basis. This Article is the first to empirically examine the experience with the Say-on-Golden-Parachute (“SOGP”) vote. We find that the SOGP voting regime is likely ineffective in controlling GP compensation. First, proxy advisors tend to adopt a one-size-fits-all approach to recommendations on SOGP votes. Second, shareholders tend to adhere to advisor recommendations. Finally, the size of golden parachutes appears to be increasing in the years following 2010 and the golden parachutes that are amended immediately prior to SOGP votes tend to grow rather than shrink. These findings contrast with the research that has examined Say-on-Pay (“SOP”), and we suggest that the differences between the two regimes lie in the absence of second-stage discipline for SOGP votes. We offer potential avenues for improving SOGP’s ability to shape change-in-control compensation practices, such as making SOGP votes (partially) binding, and making the GP payment and SOGP voting information more readily available to shareholders of corporations where the target directors also serve as directors and also of acquiring corporations.

Topic: Are M&A Contract Clauses Value Relevant to Bidder and Target Shareholders? (co-authored with John Coates & Ge Wu)

• Darius Palia, Professor and Thomas A. Renyi Endowed Chair in Banking, Rutgers Business School and Senior Fellow, Columbia Law School

Location: Jerome Greene Hall, Room 502

Abstract: Merger and acquisition deals are governed by merger contracts which are negotiated between bidder and target in order to communicate deal terms, specify risk sharing between the parties, and describe dispute management provisions in case of litigation. In a large sample of manually collected U.S. deal contracts involving publicly traded bidders and targets, we construct indices of M&A contract clauses based on legal scholars’ and practitioners’ a priori predictions and examine the relationship between announcement abnormal returns and different types of clauses. We find that bidder protective clauses correlate with higher bidder abnormal returns while target protective clauses and competition clauses correlate with higher target abnormal returns. Further analysis shows that bid premiums are increasing in target protective clauses and competition clauses, and deal completion probabilities are lower with more bidder protective clauses. These results are consistent with the expert lawyer/efficient contracting view of Cain, Macias, and Davidoff Solomon (2014), and Coates (2016), and against M&A contracts as immaterial boilerplate agreements.

Topic: Corporate Climate: Using Machine Learning to assess Climate Risk Disclosures and Susceptibility

• Eric Talley, Isidor and Seville Sulzbacher Professor of Law and Co-Director, Millstein Center for Global Markets and Corporate Ownership

Location: Jerome Greene Hall, Room 807

Abstract: A decade ago, the SEC instructed issuers to disclose material climate-related risks to their investors on a routine basis. Nevertheless, in the years since there has not emerged a standardized way to make/detect such disclosures, nor is there a good way for assessing what issuers should be making them. This project takes a stab at both tasks, with the assistance of text analysis and machine learning techniques. We first utilize supervised learning techniques to train an algorithmic classifier on SEC documents to detect a bona fide climate risk disclosures. Second, we use a database of macro-economic climate risk events to formulate an asset-pricing climate “factor,” allowing us to estimate climate betas in an empirical asset pricing model for all publicly traded companies. Our inquiry ultimately facilitates an assessment not only of what companies are making climate risk disclosures, but also which of them should be doing so.

Topic: Short and Distort

• Joshua Mitts, Associate Professor, Columbia Law School

Location: Jerome Greene Hall, Room 807

Abstract: Pseudonymous attacks on public companies are followed by stock price declines and sharp reversals. I find these patterns are likely driven by manipulative stock options trading by pseudonymous authors. Among 1,720 pseudonymous attacks on mid- and large-cap firms from 2010–2017, I identify over $20.1 billion of mispricing. Reputation theory suggests these reversals persist because pseudonymity allows manipulators to switch identities without accountability. Using stylometric analysis, I show that pseudonymous authors exploit the perception that they are trustworthy, only to switch identities after losing credibility with the market.

Topic: The Sucker Norm (Decision-Making Under Fear of Being Suckered)

• Tess Wilkinson-Ryan, Professor of Law and Psychology & Deputy Dean, Penn Law School

Location: Jerome Greene Hall, Room 701 (Case Lounge)

Introduction: It sucks to be a sucker. In order for one person to be a sucker, someone else must behave badly: suckers are the victims of cheaters, scoundrels, and other selfish agents. Nonetheless, as a victim, a sucker gets as much scorn as pity. This is partly because suckers are somewhat to blame, inasmuch as they were naïve or stupid enough to agree to a bad deal. Therefore, feeling suckered is unusually aversive, compounding a material loss with blame from oneself and others. In this paper, we will review the theoretical and empirical scholarship bearing on the notion of being a sucker. We will ultimately suggest that there is a social norm against being a sucker, and that a number of experimental results from economics and psychology could be reconsidered in light of this “sucker norm.” First, we establish, at least for the purposes of this analysis, the basic parameters of what it means to be a sucker. Second, we consider when the fear of being a sucker is helpful or normative, and when it seems to be misapplied to cases in which it might actually lead to sub-optimal outcomes. We suggest that the fear of being a sucker is especially potent because it defies a social norm. Third, we review research on situations in which people might try (and succeed) to avoid invoking the sucker norm so that they can accept a disadvantageously inequitable allocation when there is no chance for a higher payoff. We discuss how certain forms of retaliation and punishment might be explained as ways to alleviate the uncomfortable feeling of being a sucker. Finally, we offer some preliminary data on the effect of the sucker norm on behavior in experimental games.

Topic: Misalignment: The New Financial Order and the Failure of Financial Regulation

• Joel Seligman, Professor and Former President, University of Rochester & Scholar in Residence, Columbia Law School (2018 - 2019)

Location: Jerome Greene Hall, Room 807

Preface Excerpt: In The Transformation of Wall Street: A History of the Securities and Exchange Commission and Modem Corporate Finance (3d ed. Aspen 2003), I wrote a history of the SEC from 1929–1933 stock market crash until the enactment of the Sarbanes-Oxley Act in 2002. Misalignment: The New Financial Order and the Failure of Regulation is the successor to Transformation which carries the story of financial regulation forward in the broader account of banking insurance and securities regulation before and after the 2007 2009 financial crisis. Misalignment necessarily involves a Tolstoyian narrative to capture the full sweep of why our financial and economic systems melted down during 2007–2009 and not only involves a detailed examination of what happened during those years, but more importantly, why our $30 trillion financial system proved so unexpectedly fragile. This is a story that reaches back to the formation of our banking, securities, insurance and housing regulatory systems, a story of well-intended regulation, typically designed to address specific industry crises, being utterly overwhelmed by a global crisis.

Topic: The Public Company Transformed

• Brian Cheffins, Professor, Cambridge University Law Faculty

Location: Jerome Greene Hall, Room 807

Abstract: For decades, the public company has played a dominant role in the American economy. Since the middle of the 20th century, the nature of the public company has changed considerably. The transformation has been a fascinating one, marked by scandals, political controversy, wide swings in investor and public sentiment, mismanagement, entrepreneurial verve, noisy corporate “raiders” and various other larger-than-life personalities. Nevertheless, amidst a voluminous literature on corporations, a systematic historical analysis of the changes that have occurred is lacking. The Public Company Transformed correspondingly analyzes how the public company has been recast from the mid-20th century through to the present day, with particular emphasis on senior corporate executives and the constraints affecting the choices available to them.

The book’s chronological point of departure is the managerial capitalism era, which prevailed in large American corporations following World War II. The book explores managerial capitalism’s rise, its 1950s and 1960s heyday, and its fall in the 1970s and 1980s. The book goes on to describe prosperity American public companies and executives enjoyed during the 1990s and a reversal of fortunes in the 2000s precipitated by corporate scandals and the financial crisis of 2008. Topics canvassed include company boards, shareholder activism, chief executive pay, regulatory trends and concerns about oligopoly. The volume concludes by offering conjectures on the future of the public corporation, and suggests that, despite pessimistic predictions to the contrary, the public company is destined to remain a crucial economic actor.