Working paper / Johann-Wolfgang-Goethe-Universität, Institut for Law and Finance
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21
Revised Draft: January 2005, First Draft: December 8, 2004 The picture of dispersed, isolated and uninterested shareholders so graphically drawn by Adolf Berle and Gardiner Means in 19321 is for the most part no longer accurate in today's market, although their famous observations on the separation of control and ownership of public corporations remain true.
148
André Prüm has asked me to talk about “La Théorie de l´organe” supposing that this is a German invention. Well, we cannot claim the authorship or copyright for that, but it is true that this doctrine is still dominating German doctrinal thinking in company law. Let me first look at the historical development and background of this theory and then ask for its actual meaning and practical consequences.
9
While hedge funds have been around at least since the 1940's, it has only been in the last decade or so that they have attracted the widespread attention of investors, academics and regulators. Investors, mainly wealthy individuals but also increasingly institutional investors, are attracted to hedge funds because they promise high “absolute” returns -- high returns even when returns on mainstream asset classes like stocks and bonds are low or negative. This prospect, not surprisingly, has increased interest in hedge funds in recent years as returns on stocks have plummeted around the world, and as investors have sought alternative investment strategies to insulate them in the future from the kind of bear markets we are now experiencing. Government regulators, too, have become increasingly attentive to hedge funds, especially since the notorious collapse of the hedge fund Long-Term Capital Management (LTCM) in September 1998. Over the course of only a few months during the summer of 1998 LTCM lost billions of dollars because of failed investment strategies that were not well understood even by its own investors, let alone by its bankers and derivatives counterparties. LTCM had built up huge leverage both on and off the balance sheet, so that when its investments soured it was unable to meet the demands of creditors and derivatives counterparties. Had LTCM’s counterparties terminated and liquidated their positions with LTCM, the result could have been a severe liquidity shortage and sharp changes in asset prices, which many feared could have impaired the solvency of other financial institutions and destabilized financial markets generally. The Federal Reserve did not wait to see if this would happen. It intervened to organize an immediate (September 1998) creditor-bailout by LTCM’s largest creditors and derivatives counterparties, preventing the wholesale liquidation of LTCM’s positions. Over the course of the year that followed the bailout, the creditor committee charged with managing LTCM’s positions effected an orderly work-out and liquidation of LTCM’s positions. We will never know what would have happened had the Federal Reserve not intervened. In defending the Federal Reserve’s unusual actions in coming to the assistance of an unregulated financial institutions like a hedge fund, William McDonough, the president of the Federal Reserve Bank of New York, stated that it was the Federal Reserve’s judgement that the “...abrupt and disorderly close-out of LTCM’s positions would pose unacceptable risks to the American economy. ... there was a likelihood that a number of credit and interest rate markets would experience extreme price moves and possibly cease to function for a period of one or more days and maybe longer. This would have caused a vicious cycle: a loss of investor confidence, lending to further liquidations of positions, and so on.” The near-collapse of LTCM galvanized regulators throughout the world to examine the operations of hedge funds to determine if they posed a risk to investors and to financial stability more generally. Studies were undertaken by nearly every major central bank, regulatory agency, and international “regulatory” committee (such as the Basle Committee and IOSCO), and reports were issued, by among others, The President’s Working Group on Financial Markets, the United States General Accounting Office (GAO), the Counterparty Risk Management Policy Group, the Basle Committee on Banking Supervision, and the International Organization of Securities Commissions (IOSCO). Many of these studies concluded that there was a need for greater disclosure by hedge funds in order to increase transparency and enhance market discipline, by creditors, derivatives counterparties and investors. In the Fall of 1999 two bills were introduced before the U.S. Congress directed at increasing hedge fund disclosure (the “Hedge Fund Disclosure Act” [the “Baker Bill”] and the “Markey/Dorgan Bill”). But when the legislative firestorm sparked by the LTCM’s episode finally quieted, there was no new regulation of hedge funds. This paper provides an overview of the regulation of hedge funds and examines the key regulatory issues that now confront regulators throughout the world. In particular, two major issues are examined. First, whether hedge funds pose a systemic threat to the stability of financial markets, and, if so, whether additional government regulation would be useful. And second, whether existing regulation provides sufficient protection for hedge fund investors, and, if not, what additional regulation is needed.
86
Reform of the securities class action is once again the subject of national debate. The impetus for this debate is the reports of three different groups – The Committee on Capital Market Regulation, The Commission on the Regulation of U.S. Capital Markets In the 21st Century, and McKinsey & Company. Each of the reports focuses on a single theme: how the contemporary regulatory culture places U.S. capital markets at a competitive disadvantage to foreign markets. While multiple regulatory forces are targeted by each report’s call for reform, each of the reports singles out securities class actions as one of the prime villains that place U.S. capital markets at a competitive disadvantage. The reports’ recommendations range from insignificant changes to drastic curtailments of private class actions. Surprisingly, these current-day cries echo calls for reform heeded by Congress in the not too distant past. Major reform of the securities class action occurred with the Private Securities Litigation Reform Act of 1995.5 Among the PSLRA’s contributions is the introduction of procedures by which the court chooses from among competing petitioners a lead plaintiff for the class. The statute commands that the petitioner with the largest financial loss suffered as a consequence of the defendant’s alleged misrepresentation is presumed to be the most adequate plaintiff. Thus, the lead plaintiff provision supplants the traditional “first to file” rule for selecting the suit’s plaintiff with a mechanism that seeks to harness to the plaintiff’s economic self interest to the suits’ prosecution. Also, by eliminating the race to be the first to file, the lead plaintiff provision seeks to avoid “hair trigger” filings by overly eager plaintiffs’ counsel which Congress believed too frequently gave rise to incomplete and insubstantially pled causes of action. The PSLRA also introduced for securities class actions a heightened pleading requirement8 as well as a bar to the plaintiff obtaining any discovery prior to the district court disposing of the defendants’ motions to dismiss. By introducing the requirement that allegations involving fraud must be plead not only with particularity, but also that the pled facts must establish a “strong inference” of fraud, the PSLRA cast aside, albeit only for securities actions, the much lower notice pleading requirement that has been a fixture of American civil procedure for decades. Substantive changes to the law were also introduced by the PSLRA. With few exceptions, joint and several liability was replaced by proportionate liability so that a particular defendant’s liability is capped by that defendant’s relative degree of fault. Similarly, contribution rights among co-violators are also based on proportionate fault of each defendant. Three years after the PSLRA, Congress returned to the topic again by enacting the Securities Litigation Uniform Standards Act;13 this provision was prompted by aggressive efforts of plaintiff lawyers to bypass the limitations, most notably the bar to discovery and higher pleading requirement, of the PSLRA by bringing suit in state court. Post-SLUSA, securities fraud class actions are exclusively the domain of the federal court. In this paper, we examine the impact of the PSLRA and more particularly the impact the type of lead plaintiff on the size of settlements in securities fraud class actions. We thus provide insight into whether the type of plaintiff that heads the class action impacts the overall outcome of the case. Furthermore, we explore possible indicia that may explain why some suits settle for extremely small sums – small relative to the “provable losses” suffered by the class, small relative to the asset size of the defendantcompany, and small relative to other settlements in our sample. This evidence bears heavily on the debate over “strike suits.” Part I of this paper sets forth the contemporary debate surrounding the need for further reforms of securities class actions. In this section, we set forth the insights advanced in three prominent reports focused on the competitiveness of U.S. capital markets. In Part II we first provide descriptive statistics of our extensive data set, and thenuse multivariate regression analysis to explore the underlying relationships. In Part III, we closely examine small settlements for clues to whether they reflect evidence of strike suits. We conclude in Part IV with a set of policy recommendations based on our analysis of the data. Our goals in this paper are more modest than the Committee Report, the Chamber Report and the McKinsey Report, each of which called for wide-ranging reforms: we focus on how the PSLRA changed securities fraud settlements so as to determine whether the reforms it introduced accomplished at least some of the Act’s important goals. If the PSLRA was successful, and we think it was, then one must be somewhat skeptical of the need for further cutbacks in private securities class action so soon after the Act was passed.
44
This Paper will look at the changing nature of asset management, and will examine the nature of the European framework for collective investment undertakings, enshrined in the UCITS Directive2 in that light. This question whether the UCITS Directive in its current form remains an appropriate European response to the changing investment management landscape is an issue with which the European Commission is actively engaging through its Green Paper on the Enhancement of the EU Framework for Investment Funds, published in July 2005.3 But before considering these important questions, it is necessary to begin with an idea of what a collective investment, more specifically a UCITS actually is and how it fits conceptually in the broader world of pooled investments.....
52
Die Studie befaßt sich mit den rechtlichen Anforderungen an die Umwandlung und den Umtausch von Finanzinstrumenten. Finanzinstrumente in dem hier gemeinten Sinne sind Aktien und ausgewählte Schuldverschreibungsformen (Finanzierungsgenußrechte; Wandelschuldverschreibungen; einfache Schuldverschreibungen). Die Umwandlung oder der Umtausch von Finanzinstrumenten, zusammenfassend auch als Konversion bezeichnet, sind Verfügungsgeschäfte. Dabei werden hier nur Verfügungsgeschäfte zwischen dem Emittenten und dem Investor betrachtet. Nicht behandelt werden auch die besonderen Gestaltungsfragen und Gestaltungsmöglichkeiten, die sich für die Emittenten und Investoren bei der Umstrukturierung (Umwandlung, Konzernierung usw.) des Emittenten selbst ergeben. ....
149
Die Empfehlung des Corporate Governance-Kodex (Ziff. 5.4.2), „dem Aufsichtsrat soll eine nach seiner Einschätzung angemessene Anzahl unabhängiger Mitglieder angehören“, wirft in der Praxis nach wie vor Fragen auf. Im Folgenden sollen einige Thesen zur Auslegung dieser Empfehlung aufgestellt werden. Eine rechtspolitische Auseinandersetzung mit ihr und Änderungsvorschläge sind an dieser Stelle nicht beabsichtigt.
109
This paper analyses the regulatory framework which applies to the determination of directors’ remuneration in Europe and examines the extent to which European firms follow best practices in corporate governance in this area, drawing on an empirical analysis of the governance systems that European firms adopt in setting remuneration and, in particular, on an empirical assessment of their diverging approaches to disclosure. These divergences persist despite recent reforms. After an examination of the link between optimal remuneration, corporate governance and regulation and an assessment of how regulatory reform has evolved in this area, the paper provides an overview of national laws and best practice corporate governance recommendations across the Member States, following the adoption of the important EC Recommendations on directors’ remuneration and on the role of non-executive directors in 2004 and 2005, respectively. This overview is largely based on the answers to questionnaires sent to legal experts from seventeen European Member States. The paper also provides an empirical analysis of governance practices and, in particular, firm disclosure of directors’ remuneration in Europe’s largest 300 listed firms by market capitalisation. The paper reveals that, notwithstanding a swathe of reforms across the Member States in recent years and related harmonisation efforts, disclosure levels still vary from country to country and are strongly dependent on the existence of regulations and best practice guidelines in the firm’s home Member State. Convergence in disclosure practices is not strong; only a few basic standards are followed by the majority of the firms examined and there is strong divergence with respect to most of the criteria considered in the study. Consistent with previous research, our study reveals clear differences not only with respect to remuneration disclosure, but also with respect to shareholder engagement and the board’s role in the remuneration process and in setting remuneration guidelines. Ownership structures still ‘matter’; these divergences tend to follow different corporate governance systems and, in particular, the dispersed ownership/block-holding ownership divide. They do not appear to have been smoothed since the EC Company Law Action Plan was launched and notwithstanding the harmonisation that has been attempted in this field. Keywords: Directors’ remuneration, corporate governance, disclosure, European regulation JEL Classifications: G30, G38, J33, K22, M52