Results matching “sarb”

SarbOx vs. NYC's future, cont'd - PointOfLaw Forum

John Fund in the WSJ's, on some of the evidence Gov.-elect Spitzer is at such pains to ignore or deny:

This year, Hong Kong is likely to end up as the No. 1 market for stock offerings world-wide....Henry Tang, Hong Kong's financial secretary, couldn't be more blunt on the good fortune Sarbanes-Oxley has brought his city. ... "Thank you, Mr. Sarbanes and Mr. Oxley," he said, referring to Democratic Sen. Paul Sarbanes and GOP Rep. Mike Oxley, the law's chief sponsors.

Other stock markets are doing all they can to avoid emulating U.S.-style regulation. Ed Balls, Britain's economic secretary, says that his government will continue "to safeguard the light touch and proportionate regulatory regime that has made London a magnet for international business." He recently traveled to Hong Kong to call for a "strengthened partnership" between the "two leading global financial centers."...

Last week Stephen Ross, one of New York's premiere developers, warned of a ripple effect: By pushing companies abroad, Sarbox could weaken New York's real estate market. That's why Rep. Gregory Meeks, a Democrat from Queens, is sponsoring legislation to ease Sarbox's audit burden for small companies.

Parade of new blogs - PointOfLaw Forum

Mark Obbie, at Syracuse University's S.I. Newhouse School of Public Communications, has launched LawBeat, a new blog on media coverage of law for the school's Carnegie Legal Reporting Program. Sandy Szwarc, who comments often on the politics of compulsory nutrition, has a new blog entitled Junkfood Science. And Robert Bork Jr., son of the judge and head of his own litigation communications consultancy in Washington, D.C., has begun LegalPRBlawg to cover public relations issues related to law and litigation.

On the corporate governance beat, Financial Executives International has a blog on the effects of Sarbanes-Oxley Section 404. Bruce Carton's Securities Litigation Blog, often linked in this space, has been folded into the ISS Corporate Governance Blog. And as noted on Overlawyered the other day, "Not only is Prof. Bainbridge back blogging, now split into three avatars, but Beldar is back, too."

Paulson report, cont'd - PointOfLaw Forum

Ted isn't the only one who found the committee's actual policy recommendations to be rather weak tea, given the report's alarming diagnosis of flagging U.S. financial competitiveness. (Given that Floyd Norris and Stephen Labaton at the Times are going to blast you anyway, why not go for what really needs doing?) The New York Post, in an article given the sprightly title "Sarbox Detox Now: Panel", says "some criticism of [the] report" for not going far enough "came from the venture capital business":

"This is a step in the right direction, but it does not go nearly far enough to address the deep roots of the problem," said Bob Grady, a partner at Carlyle Venture Partners. "There were way too many 'established company' guys on this committee, and not enough people who think about job creation."

Grady, who is also chairman of the National Venture Capital Association, said that the cost for small companies to comply with Section 404 is the same as for large companies.

"It is insane that a start-up with a handful of employees has to pay the exact same amount to comply with the law as Wal-Mart," he said. "We won't see a sustained expansion of U.S. listing activity until this is addressed."

Thanks to the many blogs that linked my London Times column of last week on the subject, among them InstaPundit, Stephen Bainbridge, Wired GC, D and O Diary, TigerHawk, Cities on a Hill (more here), and (guestblogging at Lies, Damn Lies and Forward-Looking Statements) Werner Kranenburg.

NYSE's John Thain - PointOfLaw Forum

For a Wall Street guy, he sounds pretty outspoken:

Thain also cited competition between state and federal regulators as another reason why some companies list their shares abroad and sounded relieved that New York Attorney General Eliot Spitzer was moving into the governor's mansion.

"We really don't need all of our different regulators trying to figure out who is the toughest cop," he said.

Despite his confidence that Sarbanes-Oxley relief is on the way, Thain was less optimistic that the new Democratic-controlled Congress would put a stop to what he sees as a flood of frivolous shareholder lawsuits against U.S. companies.

"Class-action lawsuits are a tax on all companies and ultimately consumers who do business in the United States," Thain said.

Six more observations - PointOfLaw Featured Discussion

I agree with Walter's assessments, but I have some other observations.

1) A big story for the Democrats is how, while leftist activists attempt to purge some successful party candidates who were perceived as ideologically incorrect, the party itself has been willing to embrace nontraditional Democrats. It would be potentially exciting that a Reagan Democrat like James Webb returns to the party. But it turns out to be disappointing: the campaigns of Webb (Senate, Va.) and Bob Casey (Senate, Pa.) simply parrot ATLA talking points. Heath Shuler (NC 11) and Mike Weaver (KY 2) ignore the liability reform issue entirely; they're "conservative" because they don't support abortion rights. That the Democrats continue to avoid a popular issue that is (1) good for the country and (2) could attract many independents and moderate Republicans shows just how in thrall they are to the trial lawyers.

2) In contrast, the Republicans in the legislative branch (if not the executive branch) have had little compunction in throwing their supporters to the wolves if they think it will get them votes. It's Chuck Schumer and Nancy Pelosi who are calling for scaling back Sarbanes-Oxley, the bill where Congressional Republicans acted like a matador in waving it through; Congressional Republicans have been happy to go along with the bogus claims of gas-price gouging.

3) Another interesting story: what happens if the Democrats strip Joe Lieberman, headed for easy reelection, of his seniority? He may just be the last Democrat in the Senate who regularly takes reasonable positions on liability reform—though it's promising that Charles Schumer has recently seen some light. I just don't see this scenario happening unless the Republicans hold 52 seats, and perhaps not even then; the risk of Lieberman switching parties is too great.

4) Speaking of the Senate, the best case scenario for the Republicans is 52-48, with 51-49 or 50-50 or even 49-51 more likely. But even in the best case scenario, conservative Supreme Court judicial nominations are going to have trouble, especially if it's a replacement of a Stevens or a Ginsburg. While Alito got 58 votes, including from several Democrats, the Democratic whips will be working harder to embarrass Bush in a closer vote.

5) ATLA is throwing money into a handful of House races, but not once in their expensive advertising campaigns do they raise issues of liability reform.

6) The House race where liability issues come up strongest is Iowa's open First Congressional District (vacated by Jim Nussle, running for governor) where Republican Mike Whalen is running against Iowa Trial Lawyers Association president Bruce Braley. Whalen's advertising calls Braley a "greedy trial lawyer" and criticizes his ties to ATLA and some of his cases directly. Braley wrote a 1998 op-ed defending the result in the infamous McDonald's coffee case, and that's been used against him, too. This is a change of pace from the quieter Republican hands-off approach against John Edwards's record in 2004, though that might just be because voters do not care much about VP candidates. Reuters has Braley up by seven points; lefty bloggers have rehashed ATLA talking points in defending Braley, but Braley himself largely ignores the liability reform issue, though that won't be the case when he's in Congress.

NY Times on future reforms - PointOfLaw Forum

The New York Times article has some remarkable good news: the Bush administration is looking into sweeping moves to reform securities law, including paring Sarbanes-Oxley (Mar. 6); limiting the aggressiveness of the Thompson memo; federal limits on overzealous state attorneys general; and, notably, ending the judicially-created civil enforcement of 10b-5, which has led mostly to strike-suit mischief and left-pocket-to-right-pocket wealth transfers taxed by attorneys (e.g., Jun. 26). But the headline tells it all: "Businesses Seek New Protection on Legal Front." As even the left-leaning Slate notes, "The story has the usual he said-she said, with several experts pointing out that scaling back regulations would be a mistake. But what it lacks is a good analysis of Sarbanes-Oxley's effect on business and the economy. While it may be tempting to toss this all off as the Bush administration seeking to help out buddies in the business world, there's a lot more at stake here." That analysis is present in the Wall Street Journal, where Glenn Hubbard and Brookings Institute chair John Thornton discuss rationalizing securities regulation.

Update, Oct. 31: See also Larry Ribstein today.

The Sarbanes-Oxley Debacle: What We've Learned; How to Fix It - books

Enacted in the wake of the Enron collapse and other corporate scandals stemming from the bursting of the dot-com bubble, the Sarbanes-Oxley act placed new regulatory and litigation burdens on U.S. public companies. Butler and Ribstein argue that the Sarbanes-Oxley Act, although a legislative disaster, is not beyond saving. The Sarbanes-Oxley Debacle examines the direct and indirect costs imposed by the recent legislation, and proposes reforms that could mitigate some of its worst effects. Among their proposals: applying Sarbanes-Oxley to larger corporations only; reducing the internal controls disclosure requirement; and prohibiting private lawsuits based on the Act.

Bainbridge on a roll - PointOfLaw Forum

Occasional Point of Law contributor Stephen Bainbridge is on a roll on his blog: important posts on Sarbanes-Oxley (Sep. 20 and Sep. 21); on Lockyer's global warming suit (including a link to an excellent amicus brief in a similar case); and on the problem of voter fraud.

Bainbridge also links to what appears to be a fascinating paper by Robert Rasmussen and Doug Baird that suggests "that the challenge of aligning the managers' incentives has been drastically overstated and the way in which legal rules affect hiring (and firing) decisions has been too often ignored."

Corporate Governance: In Praise of the Status Quo - PointOfLaw Featured Discussion

In U.S. corporation law, it is very, very difficult for shareholders to challenge the decisions made by the board of directors of their portfolio companies. Perhaps this difficulty is a vestige of some evolutionary deadend, like the appendix, but when one sees the same sort of difficulties cropping up in rule after rule and context after context, it becomes fair to at least ponder the possibility that it has some sort of survival benefit.

Director Primacy is Pervasive

In his latest post, Gordon complains that "every example of director primacy in [Steve's] post was drawn from the context of shareholder litigation." But so what? I'm not sure how we would measure degrees of difficulty in this context, but it's fair to say that shareholders have a hard time holding directors to account via the vote, just like they do via the lawsuit.

The vast majority of corporate decisions are made by the board of directors acting alone, or by persons to whom the board has properly delegated authority. Shareholders have virtually no right to initiate corporate action and, moreover, are entitled to approve or disapprove only a very few board actions.

Under the Delaware code, for example, shareholder voting rights are essentially limited to the election of directors and approval of charter or bylaw amendments, mergers, sales of substantially all of the corporation�s assets, and voluntary dissolu�tion. As a formal matter, only the election of directors and amending the bylaws do not require board approval before shareholder action is possible. In practice, of course, even the election of directors (absent a proxy contest) is predetermined by the existing board nominating the next year�s board.

The statutory decision-making model thus is one in which the board acts and shareholders, at most, react.

As I detail in my article, The Case for Limited Shareholder Voting Rights, 53 UCLA L. Rev. 601 (2006), corporation law�s direct restrictions on shareholder power are supplemented by a host of other rules that indirectly prevent shareholders from exercising significant influence over corporate decision making. Three sets of statutes are especially important: (1) disclosure requirements pertaining to large holders; (2) shareholder voting and communication rules; (3) insider trading and short swing profits rules. These laws affect shareholders in two respects. First, they discourage the formation of large stock blocks. Second, they discourage communication and coordination among shareholders.

Indeed, Harvard law professor Lucian Bebchuk, perhaps the leading proponent of shareholder empowerment, says that under the current regime the shareholder franchise is just a "myth." (See also my friend and UCLA law school colleague Lynn Stout's new paper, The Mythical Benefits of Shareholder Control, which compares shareholder control to "vampires" and "alligators in sewers.")

Gordon suggests that I "must contend that" voting and litigation "like the human vermiform appendix, either have no function or have a function that is hidden from our understanding." I decline to do either. Instead, as I explained in The Case for Limited Shareholder Voting Rights:

... like all accountability mechanisms, shareholder voting must be constrained in order to preserve the value of authority. As Arrow observes:

To maintain the value of authority, it would appear that [accountability] must be intermittent. This could be periodic; it could take the form of what is termed �management by exception,� in which authority and its decisions are reviewed only when performance is sufficiently degraded from expectations. . . .

The function of shareholder voting thus should be apparent. Like shareholder litigation, it "is properly understood not as an integral aspect of the corporate decision-making structure, but rather as an accountability device of last resort to be used sparingly, at best."

In sum, it strikes me as eminently fair to conclude that �Corporate governance is best characterized as based on �director primacy.�� Larry Ribstein, Why Corporations?, 1 Berkeley Bus. L.J. 183, 196 (2004). Cf. Harry G. Hutchison, Director Primacy And Corporate Governance: Shareholder Voting Rights Captured By The Accountability/Authority Paradigm, 36 Loy. U. Chi. L.J. 1111, 1194 (2005) (�Although 'Delaware has not explicitly embraced director primacy,' the relevant statutory provisions and the Unocal/Revlon/Unitrin paradigm have largely intimated that directors retain authority and need not passively allow either exogenous events or shareholder action to determine corporate decision-making.�); Kevin L. Turner, Settling The Debate: A Response To Professor Bebchuk's Proposed Reform Of Hostile Takeover Defenses, 57 Ala. L. Rev. 907, 927-28 (2006) ("Delaware jurisprudence favors director primacy in terms of the definitive decisionmaking power, while simultaneously requiring directors to be ultimately concerned with the shareholders' interest. ... The Delaware jurisprudence, while not explicitly affirming "director primacy," does implicitly leave the directors to make decisions with shareholders expressing their views only in specific and limited situations.").)

Establishing that director primacy is the status quo, of course, does not dispose of the question of whether it ought to be the status quo.

The Argument from the Status Quo

Proponents of Intelligent Design content that "there are natural systems that cannot be adequately explained in terms of undirected natural forces and that exhibit features which in any other circumstance we would attribute to intelligence." I express no opinion on the biological science of Intelligent Design, but when I look at corporate law I see a clockmaker. The system is so pervasively tilted in one direction that it one plausibly infers it was designed to do so. (Cf. Hollinger Inc. v. Hollinger Int'l, Inc., 858 A.2d 342, 374 (Del. Ch. 2004), in which Leo Strine referred to "the director-centered nature of our law, which leaves directors with wide managerial freedom subject to the strictures of equity, including entire fairness review of interested transactions. It is through this centralized management that stockholder wealth is largely created, or so much thinking goes.")

Even if the difficulties shareholders face in holding directors to account are mere evolutionary accident, moreover, it was a very happy accident. Gordon complains that I reason "from the status quo." I admit it freely.

Organizational structures that survive over time deserve the benefit of the doubt. Presumably, they offer features that contribue to their survival.

In fact, of course, the American corporation has not simply survived, it has thrived. John Micklethwait and Adrian Wooldridge opined that the corporation is �the basis of the prosperity of the West and the best hope for the future of the rest of the world.� John Micklethwait & Adrian Wooldridge, The Company: A Short History of a Revolutionary Idea xv (2003). A comprehensive review of the evidence by Holmstrom and Kaplan is temperate only by comparison:

"Despite the alleged flaws in its governance system, the U.S. economy has performed very well, both on an absolute basis and particularly relative to other countries. U.S. productivity gains in the past decade have been exceptional, and the U.S. stock market has consistently outperformed other world indices over the last two decades, including the period since the scandals broke. In other words, the broad evidence is not consistent with a failed U.S. system. If anything, it suggests a system that is well above average." Bengt R. Holmstrom & Steven N. Kaplan, The State of U.S. Corporate Governance: What�s Right and What�s Wrong? (Sept. 2003).

My colleague Lynn Stout's new paper argues that the evidence "suggests shareholders in public firms reap net benefits from board control." In the various articles I've written on director primacy, I've reached the same conclusion and made similar arguments.

Yet, even if the evidence doesn't prove director primacy is a contributing factor in the success of the US corporation, at the very least I can insist on a much stronger showing that we have seen to date from the "reformers."

Political thinkers from Plato to Edmund Burke have taught that prudence is the chief virtue of true statesmen. If nothing else, the law of unintended consequences must be given its due. The prudent legislator is hesitant to promulgate reforms that may give rise to new and unforeseen abuses worse than the evil to be cured.

Consider Sarbanes-Oxley, the great triumph of corporate governance reformers. When it was faced with voter unrest arising from the bursting of the tech stock bubble and high-profile misconduct by corporate directors and officers (Enron et al.), Congress decided that Something Must be Done. So Congress put together a package of reforms of varying provenance that had been kicking around Capitol Hill for ages and sent them up to President Bush for signing. And, ever since, it has been one unintended consequence after another.

Roberta Romano calls SOX "quack" corporate governance. Henry Butler and Larry Ribstein call it a "debacle."

The prospect of more such "reform" is precisely why I think we ought to assume that legal changes designed to promote "increased shareholder participation" are presumptively bad." Guilty until proven innocent by clear and convincing evidence.

What's the Case for Change?

Where is the proof? The observant reader will note that Gordon's posts have been mainly a critique of my "approach to the corporate governance system." What is the affirmative case for reforms to promote "increased shareholder participation"? Or, for that matter, the negative case against the status quo?

Descending to the pink sheets - PointOfLaw Forum

Just great for investors: "the higher costs that accompany increased disclosure and stiffened internal controls [under Sarbanes-Oxley] appear to be driving a growing number of companies to simply withdraw from the major exchanges. Some are going private and others 'going dark,' that is, deregistering their stock with the Securities and Exchange Commission. Instead, their shares are listed on the 'Pink Sheets,' an electronic quotation medium for companies not listed on stock exchanges." (New Jersey Law Journal)

Peter Wallison: "The Canary in the Coal Mine" - PointOfLaw Forum

Peter Wallison writes for AEI:

"The warning signs are there: in the securities markets, in global financial transactions, and in the withdrawal of U.S. companies from public ownership, U.S. financial markets are no longer seen as hospitable either to companies or financial transactions. Although capital continues to flow into the United States for wealth protection, foreign companies are avoiding the United States, and financing transactions are increasingly carried out in freer and more efficient markets abroad. What this should tell us is that U.S. regulation has now gone over the tipping point. The Sarbanes-Oxley Act was the last straw. Urgent action by the Securities and Exchange Commission (SEC) and Congress is necessary if the United States is to retain its preeminence in the financial world."

Europeans skeptical of Sarbanes-Oxley - PointOfLaw Forum

In particular, it seems they've got some sort of unhappy history over there with the practice of having anonymous informants denounce people to the authorities -- they won't even go for it when it's renamed "whistleblowing". Imagine that!

The SEC's hedge fund rule: another rule bites the dust - PointOfLaw Forum

The DC Circuit struck down the SEC�s hedge fund registration rule. This is the second time that court has sent the SEC back to the drawing board, the last time being the Commission�s mutual fund independent director rule, which the DC Circuit twice rejected because the Commission didn�t do its homework. I analyze the opinion and possible implications for Sarbanes-Oxley, and securities regulation generally.

Parade of new blogs - PointOfLaw Forum

Attorney Nicole Black has launched Sui Generis, a weblog covering New York law. The Times of London (which plans a U.S. expansion soon) now has its own legal weblog. SoxFirst "focuses on Sarbanes-Oxley, business ethics, corporate governance, accounting, management and compliance, executive remuneration and similar issues". is a humor site aimed at law firm associates. Parens Patriae offers "A critical look at government involvement in the family". And our friends at the Cato Institute have set up Cato at Liberty.

The GAO's SOX report: buyer beware - PointOfLaw Forum

The GAO has a Report to the Committee on Small Business and Entrepreneurship, U.S. Senate on the Sarbanes-Oxley Act. The GAO has followed the current conventional course of the SOX defenders: Things have gone too far to deny that SOX has problems, so let's try to sweep the problems into as small a corner as possible. Here's a more complete "buyer's guide" to the GAO report.

The US as the new NJ - PointOfLaw Forum

A century ago NJ was the leading US jurisdiction for incorporations. Then Governor Woodrow Wilson got the bright idea of trying to use the NJ corporation law as an antitrust law. The rest, as they say, is history.

More recently, the US has been the leading capital market in the world. Then somebody got the bright idea of passing Sarbanes-Oxley. I discuss the latest data on the flight of foreign firms from US markets here. It's not pretty.

The new battle cry on SOX: Remember New Jersey.

Dabit and federalism - PointOfLaw Forum

Larry Ribstein suggests here and here that pro-business conservatives praising the opinion (is he talking about me?) may not be so happy with the opinion, and some of Stevens's language, down the road. I disagree.

Nasdaq, LSE and SOX - PointOfLaw Forum

The WSJ says that shares of the London Stock Exchange, which have nearly doubled in response to the NASDAQ acquisition proposal, may rise still more to reflect the "growing listings businesses for companies that want to sell their shares outside the U.S., where they aren't subjected to tough U.S. Sarbanes-Oxley financial-reporting rules." More here.

So the value of the LSE depends partly on SOX. Maybe good for LSE, and for NASDAQ if the acquisition goes through, but not necessarily for the rest of the US securities industry.

Sarbanes-Oxley at AEI - PointOfLaw Forum

Henry Butler and I made our pitch for repealing SOX at the AEI on March 13. The event, the papers, the PowerPoint presentation and other materials are here, and some more thoughts here.

A SOX amputation won't work - PointOfLaw Forum

Bob Greifeld, head of Nasdaq and self-styled "consistent supporter of the principles of Sarbanes-Oxley," now sees that something must be done about it. Writing in today's WSJ, he's worried that the burdens imposed by SOX are forcing foreign companies to leave US capital markets. His solution is to support the recommendations of the SEC's Advisory Committee on Smaller Public Companies to exempt small public firms from 404.

As I write here, this attempt at cure by amputation won't work. Congress needs to revisit, and possibly repeal, the Act. Possible spurs to action include the suit over the Constitutionality of the PCAOB and the groundswell to exempt small firms -- which the SEC may not be authorized to do.

More on this Monday at the AEI.

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