John Coates

The hype around special purpose acquisition companies — and the investor losses that have resulted since the SPAC boom began to fizzle a year ago — has led the Securities and Exchange Commission to issue harsh new SPAC rules and amendments that go beyond what many originally envisioned. The changes are so onerous that Hester Peirce, the lone commissioner who opposed them, said in a hearing Wednesday that they “seem designed to stop SPACs in their tracks.” (Peirce is the only Republican commissioner at the SEC.) ... This change addresses the criticism of SPACs being able to make overly optimistic forward-looking statements in a deSPAC because they are entitled to the safe harbor provisions of the Private Securities Litigation Act — something IPOs do not have. Last year, the SEC’s acting director of the division of corporation finance, John Coates, indicated that the SEC was prepared to challenge those protections.

Yale, Harvard and Stanford's law schools have joined forces on an initiative to keep track of large law firms' pledges surrounding their work for Russian entities, as they look to spotlight how the legal industry is responding to the Kremlin's bloody war in Ukraine. In the weeks since Russia's military invasion, at least 25 major international law firms have announced they will exit the country. But the project launched by the law schools on Wednesday claimed that, while those departures are a good first step, they are possibly misleading. ..."We saw active, clear and rapid exits from a large number of U.S. companies, but much less clarity from U.S. law firms," [John Coates] said in an email. "Those who support a war-mongering dictator ought to pay a heavy financial and reputational price. I hope our efforts can increase the likelihood that 'ought' is real."

Regulatory uncertainty dampening the deals environment, new rules changing the shareholder activism playbook, and special purpose acquisition company mergers underperforming expectations were among the hot topics at Tulane University Law School's 34th annual Corporate Law Institute. ... John Coates, a Harvard Law School professor and former official at the U.S. Securities and Exchange Commission, hammered home how uncertain the state of the world is, saying the situation in Ukraine represents an existential threat to global M&A health.

Investors so far this year have filed a record 529 environmental, social and governance resolutions, and well-known companies including Goldman Sachs, Disney and Walmart received an "F" grade on pay gaps in a new report. These are some of the stories in corporate legal news you may have missed in the past week. John Coates, who last year spent time as general counsel for the SEC and acting director of its Division of Corporation Finance, discussed a range of topics during his appearance on the first day of the Tulane University Law School's 34th annual Corporate Law Institute. Although the conference was held in person this year following an entirely virtual event in 2021, Coates — a former partner at Wachtell Lipton Rosen & Katz — was one of a few speakers who attended virtually. Coates warned during his speech that Russia's invasion of Ukraine could be a harbinger for further deterioration of business relationships across borders, especially with adversaries like China. "Globalization has been so powerful and basic for most of our practicing lives that it's taken for granted," he said. "We're at a point right now where there is real danger of that reversing to a significant extent."

The top three U.S. law schools have joined forces to track law firms' policies on working for Russian clients in the wake of that country’s invasion of neighboring Ukraine, accusing some of "splitting hairs about which clients they will avoid." Law professors at Stanford, Yale, and Harvard categorized statements by major U.S. and U.K. law firms regarding their Moscow offices and Russia-related work, calling on them to fully cut ties with the Kremlin, state-owned or controlled firms, and sanctioned entities and people. ... Harvard law professor John Coates said Thursday that researchers hope to expand the scope of the list and to monitor whether firms are living up to their commitments. Such a policing effort would be extremely difficult, however, since many law firm-client relationships are not public.

Harvard Law School professor and former U.S. Securities and Exchange Commission official John Coates wants regulators to be more forthright in debunking legal myths that he argues contributed to the boom in special purpose acquisition companies. Coates told Law360 in an interview that regulators should be "more aggressive" in countering myths that he believes SPAC industry promoters and their advisers have circulated that make SPACs appear more legally advantageous than is justified.

CFOs aiming to take their companies public by merging with a SPAC have more choices of partners than ever before. As of today, 602 SPACs are searching for companies to combine with in an initial public offering, according to SPACInsider. “Investors should be aware that competition is fierce,” the CFA Institute said. SPACs in 2021 brought to market a record 613 offerings and raised more than $162 billion, a total exceeding all previous years combined, SPACInsider data show. The pace has recently slowed, with just 41 SPAC IPOs so far this year. ... SPACs pose several hazards to investors, according to John Coates, acting director of the SEC’s Corporation Finance Division from February until October 2021.

Several ‘myths’ about the legal underpinnings for special purpose acquisition companies (SPACs) have influenced the perceived costs, benefits and risks of the so-called blank-check companies and distorted capital markets, according to John Coates, acting director of the Securities and Exchange Commission’s Corporation Finance Division from February until October 2021.

For the most part, public companies are controlled by the votes of common shareholders and the corporate directors they elect. But asset managers have significant sway. Harvard Law School’s John C. Coates extrapolates this concentration of ownership to “The Problem of Twelve.” In a working paper, he argued that “in the near future roughly twelve individuals will have practical power over the majority of U.S. public companies.” He meant that asset managers like BlackRock Inc., BLK -2.64% Vanguard Group and Fidelity Investments—primarily investing on behalf of retirement investors and savers—would essentially serve as a 12-headed corporate board, lording over all public companies.

BlackRock’s co-founder and CEO has created a business with unprecedented power. So what, exactly, did it take for him to get this far? A new book explains all. ... Lucian Bebchuk of Harvard Law School and Scott Hirst of Boston University estimated in a 2019 paper titled The Spectre of the Giant Three that the trio’s combined average stakes in the 500 biggest listed US companies had vaulted from about 5 per cent in 1998 to over 20 per cent. Their real power is even greater – and growing. Given that many shareholders don’t actually bother to vote at annual meetings, BlackRock, Vanguard and State Street now account for about a quarter of all votes cast on average, which will rise to 41 per cent over the next two decades, the academics estimated. John Coates, a Harvard Law professor, has called this rising concentration of economic power “a legitimacy and accountability issue of the first order”.

Investment giant BlackRock Inc. is giving institutional investors such as pensions and endowments the option to cast shareholder votes tied to their investments. When investors buy a fund from an asset manager, the money manager typically votes on shareholder proposals on behalf of the investors. Starting in 2022, BlackRock says its large investors can vote themselves on everything from who sits on boards to executive pay to what companies should disclose on greenhouse gas emissions. The change allows those BlackRock clients to lay claim to voting power on some $2 trillion in investments tied to index-tracking assets BlackRock manages in institutional accounts. This is about 40% of roughly $4.8 trillion of indexed equities managed by BlackRock. ... In 2018, in response to the index fund boom, Harvard Law School professor John Coates warned that voting power would be controlled by a small group of people with “practical power over the majority of U.S. public companies.”

The stock market has had quite a year. Plenty of cash is sloshing around, the pandemic recession notwithstanding, thanks to loose monetary policy, rampant inequality, crypto-speculation, and helicopter drops of cash...Indexing has also gone small, very small. Although many financial institutions offer index funds to their clients, the Big Three control 80 or 90 percent of the market. The Harvard Law professor John Coates has argued that in the near future, just 12 management professionals—meaning a dozen people, not a dozen management committees or firms, mind you—will likely have “practical power over the majority of U.S. public companies.” ... As John Coates, the Harvard professor, notes: “For the most valuable public company in the world, three individuals can in principle swing the vote of 17 percent of its shares. Generally, a significant fraction of shareholders do not vote, even if in contested battles. As a result, the 17 percent actually represents more like 25 percent or more of the likely votes in contested votes. That share of the vote will generally be pivotal.” In fact, the Big Three cast roughly 25 percent of the votes in S+P 500 companies.

We talk occasionally about the theory that BlackRock Inc. rules the world. Not BlackRock per se, exactly, but there is a small group of gigantic investment managers who are the biggest shareholders in most public companies, and who, at some level, get to tell those companies what to do. The people who run those investment managers—people like Larry Fink of BlackRock—have disproportionate power over the world. If they decide that corporations should not have staggered boards, corporations will not have staggered boards. If they decided that climate change is a pressing problem and companies need to address it, companies have to at least consider addressing it...Back in 2018, John Coates of Harvard Law School wrote a paper about this stuff called “The Future of Corporate Governance Part I: The Problem of Twelve.” One thing I like about this paper is the name: The issue, to Coates, is not something narrow like “do industries with more common ownership raise prices,” but the much broader “what should we think about the fact that a dozen people will soon control all the companies?” Another thing I like is Coates’s brief suggestion that these big funds could look to administrative law as a way to legitimate and regulate their power. (“One inspiration may be administrative law, which has to grapple with similar problems of legitimacy and accountability for agents of the state,” he writes.)

The legal principle that corporate boards must focus exclusively on maximizing value for shareholders wasn’t always taken for granted. It was enshrined in a 1919 court decision involving Henry Ford and two of his car company’s shareholders, the Dodge brothers. As chairman and majority owner of Ford Motor Co., he had repeatedly raised his workers’ pay, cut the price of the Model T, and reinvested profits in expansion. If Ford were around today his stance might be applauded by the environmental, social, and governance (ESG) movement on Wall Street...For a century there’s been a struggle between advocates of shareholder primacy and those who say corporations should take into account other priorities, particularly environmental, social, and governance issues. As ESG has gained prominence it’s generated a quiet backlash...But the power of big holders and the proxy advisory firms that help them decide how to vote their shares rubs some people the wrong way. “A small number of unelected agents, operating largely behind closed doors, are increasingly important to the lives of millions who barely know of the existence much less the identity or inclinations of those agents,” Harvard Law School professor John Coates wrote in a 2018 paper.

For years, the asset-management industry has braced itself for shocks. In 2018, $369 billion poured out of long-term mutual funds in favor of exchange-traded funds, a record at the time. In 2019, the case for traditional actively managed mutual funds became even harder to make when Charles Schwab Corp. jump-started a race to the bottom among online brokerages by eliminating commissions for ETFs along with U.S. stocks and options. If those were tremors, 2020 will go down in history as an earthquake. Even before Covid-19 roiled global markets and brought the Robinhood crowd and Dave Portnoy of Barstool Sports into the Wall Street zeitgeist, there were already signs of seismic change...If the same dozen people control every public company — Harvard professor John Coates calls it “The Problem of Twelve” — what does it mean? Should someone do something? Should those people be required to … explain their votes? Not vote their shares? Vote in a specific way? Ask their ultimate investors how to vote? Have some other formalized rules for how they vote? They have accrued all this power, sort of by accident; should there be rules for how they exercise it? Or is this just how the market works and everything is fine? There aren’t any clear answers.

An op-ed by John Coates and Robert Pozen: While the commissioners agreed unanimously on many technical and enforcement issues, policy votes divided on party lines. In 2020, more than half of final rule-makings were partisan affairs with dissents from Democratic commissioners. Partisan politics is part of Washington, D.C. Yet now a window is open for a restart if Joe Biden appoints a diplomatically minded SEC chair who can build a strong consensus among the four other commissioners. Balanced rulemaking can deepen the SEC’s legitimacy, improve staff morale and enhance its ability to resolve difficult problems. Here are five issues for a consensus agenda set by the new Chair: 1. Open private securities markets intelligently: The SEC has long allowed only sophisticated investors to buy private securities, because these securities have minimal liquidity and private issuers provide investors with little information about the risks involved. In the past few years, the Commission seems to have bought the argument that the average Joe should be able to invest in the next Google before it went public. But most startups fail, and successes go through multiple rounds of complicated funding that are difficult to evaluate. The main guards against the dangers of alluring speculation in private securities have been quantitative requirements for “accredited” investors — $200,000 in annual income or $1 million in net worth.

This summer, a bipartisan group of about a hundred academics, journalists, pollsters, former government officials and former campaign staff members convened for an initiative called the Transition Integrity Project. By video conference, they met to game out hypothetical threats to the November election and a peaceful transfer of power if the Democratic candidate, former Vice President Joe Biden, were to win...The idea was to test the machinery of American democracy...Along with disinformation campaigns, there is the separate problem of “troll armies” — a flood of commenters, often propelled by bots — that “aim to discredit or to destroy the reputation of disfavored speakers and to discourage them from speaking again,” Jack Goldsmith, a conservative law professor at Harvard, writes in an essay in “The Perilous Public Square,” a book edited by David E. Pozen that was published this year. This tactic, too, may be directed by those in power...Concerns about the harm of unfettered speech have flared on the left in the United States since the 1970s. In that decade, some feminists, led by the legal scholar Catharine A. MacKinnon and the activist Andrea Dworkin, fought to limit access to pornography, which they viewed as a form of subordination and a violation of women’s civil rights. In the 1980s and ’90s, scholars developing critical race theory, which examines the role of law in maintaining race-based divisions of power, called for a reading of the First Amendment that recognized racist hate speech as an injury that courts could redress...The Supreme Court has also taken the First Amendment in another direction that had nothing to do with individual rights, moving from preserving a person’s freedom to dissent to entrenching the power of wealthy interests. In the 1970s, the court started protecting corporate campaign spending alongside individual donations. Legally speaking, corporate spending on speech that was related to elections was akin to the shouting of protesters. This was a “radical break with the history and traditions of U.S. law,” the Harvard law professor John Coates wrote in a 2015 article published by the University of Minnesota Law School. Over time, the shift helped to fundamentally alter the world of politics.

Two primary drivers for deal activity, company market valuations and overall economic conditions, are diverging more than ever. That’s creating opportunities for both law firms and their corporate clients—and challenges for others. M+A lawyers are increasingly talking about “the winner and the losers” in the market. That’s reinforcing the need for law firms to have a diversified range of clients, including clients that are more resilient and buoyant in today’s economy, some observers say. Brian Richards, chair of Paul Hastings’ global private equity practice, said deal flow in his practice has seen an increase in August, which he said is normally a down time for deals...During the initial phases of the pandemic, the U.S. economy and the markets took a unified downturn, effectively halting large deals and providing a level of uncertainty that put even smaller deals on hold. But the stock market has rebounded, and with authority...The economy, on the other hand, has not fared near as well...John Coates, a professor of law and economics at Harvard Law School, said most law firms are probably not in a terrible spot. “As a general matter, compared to say most professional services industries, the legal services for M+A work is very fragmented,” Coates said. “Individual firms don’t tend to have a significant share of overall M+A work, so one firm isn’t necessarily being hit harder than another.” Firms that have specialized their M+A work around industries hit hard by the pandemic, like real estate or hospitality, he said, could end up in that loser bin for the time being, but most firms are geared to handle that impact as well. “Well-run firms pay attention to not letting any one client generate a large percentage of their revenues, and there aren’t too many firms that are too dependent on that,” he said. “Regardless of how the market and the economy affect companies, law firms are normally sufficiently diversified.”

President Donald Trump’s attempt to force Chinese company ByteDance to divest the U.S. version of its popular TikTok social-media app has some precedent. But the rest of the bizarre corporate drama that has recently played out in two Washingtons is not based in reality, especially the president’s demand for a cut of any deal in which Microsoft Corp. acquires TikTok. Trump said Monday he was ready to approve a deal for Microsoft MSFT, -0.01% to purchase TikTok — a change in his stance since Friday’s opposition — but only if the U.S. government receives a lot of money in exchange. On Sunday, Trump had a phone conversation with Microsoft Chief Executive Satya Nadella, in which he told the CEO that a “very substantial portion of the price [for TikTok] is going to have to come into the Treasury of the United States, because we’re making it possible for this deal to happen,” Trump said Monday...The fact that Trump seems to think that the U.S. government is acting as an investment banker in this possible match-up is a new level of delusion. Finder’s fees may be a core component of how real estate works, but not the federal government. “There is zero legal authority for the president to extort money from a company seeking to clear a deal under the laws creating CFIUS,” John Coates, a professor of law at Harvard University, said in an email. “Congress has never authorized an executive branch official, or any agency, to condition regulatory approval or clearance on the payment of the ‘cut’ of a deal, a ‘finder’s fee,’ or a bribe. The fact that the money might in theory go into the U.S. Treasury does not make it legal. Congress, and only Congress, can authorize taxes, through legislation.”

Seven weeks after Congress unleashed more than $2 trillion to deal with the coronavirus crisis, an oversight commission intended to keep track of how the money is spent remains without a leader. Four of the five members of the Congressional Oversight Commission have been appointed, but House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Mitch McConnell, R-Ky., have not agreed on a chair, leaving the commission rudderless as the federal government pumps unprecedented sums into the economy. Without a leader, the panel’s remaining members can still do some oversight work, but cannot hire staff or set up office space. The four members have not met as a group since the economic rescue law was passed by Congress and signed by President Donald Trump in late March. “If the commission is not functioning — which it is not — then there is no oversight” on a huge part of the economic rescue law, said John Coates, a professor of law and economics at Harvard Law School. So far, “it’s a non-oversight, oversight commission,″ added Kimberly Wehle, a visiting professor at American University Law School. Lawmakers trying to oversee the spending law “are surging down the rapids without a raft,″ she said. Congress created the panel to watch over $500 billion in lending to distressed industries backed by the Treasury Department and Federal Reserve. The Fed has said the money can be leveraged to offer more than $2 trillion in loans to U.S. companies.