John Coates

The 2019 proxy season is well underway, and it will be a memorable one for many reasons. Initially, the government shutdown stalled the staff’s review process by closing the Division of Corporation Finance for most of January, thereby putting some issuers at risk of acting on proxy matters without definitive guidance. Issuers must also deal with a new staff legal bulletin that adds complexity, requiring board input on two common exclusionary bases. ... Roundtable participants from both the issuer and investment communities agreed that the proxy system faces several structural problems. As Professor John Coates of Harvard Law School said at the roundtable, “there’s room for improvement; no one, I think, has ever said publicly that they would create the system that we have today if they were doing it from scratch.”

Vanguard’s John Bogle didn’t know it at the time, but when he created the first index fund in 1975 he unleashed a monster. Stock index funds have grown so popular that they now command $4.6 trillion in assets. That might seem like a good thing. After all, index funds have “democratized” investing and simplified the process for the average person. But the truth is that index funds have gotten so big that they now pose a major risk to our economy — and even to capitalism itself. Here are three reasons why. ... Harvard Law School professor John Coates likes to say that index funds create “social benefits” in the form of lower expenses. That’s true, but it is only captures a piece of the picture.

Sounding the alarm on index funds. How their runaway success has reshaped power and accountability in boardrooms and on Wall Street. Guests: John Coates, professor of law and economics at Harvard Law School where he teaches corporate governance, mergers and acquisitions and finance. Member of the Investor Advisory Committee of the Securities and Exchanges Commission.

Stock index funds have grown so popular that they now command $4.6 trillion in assets. That might seem like a good thing. After all, index funds have “democratized” investing and simplified the process for the average person. But the truth is that index funds have gotten so big that they now pose a major risk to our economy — and even to capitalism itself. ... Harvard Law School professor John Coates likes to say that index funds create “social benefits” in the form of lower expenses. That’s true, but it is only captures a piece of the picture.Because even when active managers underperform as they charge higher fees than index funds, they are still adding lots of value in our economic system.

...My concerns are shared by many academic observers. In a draft paper released in September, Prof. John C. Coates of Harvard Law School wrote that indexing is reshaping corporate governance, and warned that we are tipping toward a point where the voting power will be “controlled by a small number of individuals” who can exercise “practical power over the majority of U.S. public companies.” Professor Coates does not like what he sees, and offers tentative policy options—some necessary, often painful to contemplate. His conclusion—“The issue is not likely to go away”—is unarguable.

The debate over corporations imposing arbitration on shareholders through corporate charters and bylaws is still mostly in the realm of theory and academic furor. The Securities and Exchange Commission, as you know, is contemplating the issue, though SEC Chair Jay Clayton has said he’s in no rush to decide whether the commission will end its longtime policy of squelching proposed mandatory arbitration provisions for companies going public...In the new paper, the securities law professors – including, among other luminaries, John Coffee of Columbia, Lucian Bebchuk and John Coates of Harvard, Ann Lipton of Tulane, James Cox of Duke and Donald Langevoort of Georgetown - contend that federal securities claims are outside the scope of corporate charters and bylaws governed by Delaware law. Corporations can’t impose mandatory arbitration of federal securities claims through charters and bylaws, according to the profs’ argument, because compacts between corporations and shareholders are limited to state law governance issues, not disputes under federal securities law.

...In a recent draft paper from which I have taken these numbers, John C Coates of Harvard Law School points out that the big three’s share of any contested vote now tends to be pivotal and that on current trends, even if growth starts to taper off, a majority of the 1,000 largest US companies will be controlled, in effect, by a dozen or fewer people over the next 10 to 20 years. This leads to what he calls the Problem of Twelve, his paper’s title, whereby ownership rights, including the critical right to elect directors, will be in the hands of this tiny group. Even if the growth in passive investing fails to follow the trajectory outlined by Mr Coates, it is clear that there is already a striking concentration of power.

In a landmark 247-page opinion issued Monday, Vice Chancellor Travis Laster of Delaware Chancery Court concluded that the German healthcare company Fresenius can walk away from its $4.75 billion deal to acquire the U.S. generic drugmaker Akorn because Akorn’s business experienced a material adverse effect after the agreement was signed...I asked three law profs – Brian Quinn of Boston College, John Coates of Harvard and Albert Choi of the University of Virginia - for their early thoughts on the implications of Vice Chancellor Laster’s decision.

John Coates has a thoughtful paper on the legal and economic challenges of “the problem of twelve,” the prospect of a majority of shares in public companies being managed by just twelve entities, in effect twelve people. "[T]he rise of indexing presents a sharp, general, political challenge to corporate law. The prospect of twelve people even potentially controlling most of the economy poses a legitimacy and accountability issue of the first order – one might even call it a small “c” constitutional challenge."

...Here is a recent paper by John Coates of Harvard Law School with the imposing title “The Future of Corporate Governance Part I: The Problem of Twelve.” The “problem of twelve” is his name for “the likelihood that in the near future roughly twelve individuals will have practical power over the majority of U.S. public companies”: We are rapidly moving into a world in which the bulk of equity capital of large companies with dispersed ownership will be owned by a small number of institutions.

Information about Elon Musk's efforts to take Tesla Inc private is scarce. But some small investors wonder if top funds have an edge...Harvard Law School professor John Coates said U.S. Securities and Exchange Commission rules on fair disclosure allow the selective sharing of some details if recipients agree not to trade until what they are told becomes public. But it is hard to know how those limits might play out for Musk's outreach. "With Tesla however nothing normal is normal. So who knows," Coates said via email.

Going private is not as easy as it looks, especially if you go down a path proposed by the mercurial Elon Musk, founder and largest shareholder of Tesla Inc...John Coates, a professor of law and economics at Harvard Law School, told MarketWatch in an email, “I know of no legal way to offer public shareholders of a listed company an equity security while also going private. I also know of no legal way to offer $X billion worth securities of any kind to more than 35 unaccredited investors without registering with the SEC.”

It's no secret Elon Musk and Tesla have been afforded considerable leeway by their loyal following of shareholders...Generally, it is 'qualified' or 'accredited' investors who have the ability to own stock in private companies, or buyouts. "I know of no legal way to offer public shareholders of a listed company an equity security while also going private," says John Coates, an expert in mergers and transactions at Harvard Law School. He adds by email to Forbes, "I also know of no legal way to offer $X billion worth securities of any kind to more than 35 unaccredited investors, without registering the offering with the SEC."

...It is illegal for a director or officer of a public company “to knowingly or recklessly make material misstatements about that company,” said John Coates, a professor at Harvard Law School who teaches mergers and acquisitions. Mr. Musk’s “tweets seem cryptic at best, and it is hard to see how he has complied with his duty to not be misleadingly incomplete.”

...But since the late 1970s, despite a “Reagan revolution” inspired in part by Friedman, the scope of the U.S. government has arguably increased, while business’s influence over it has surely grown. The academic study of this influence has over the years focused largely on campaign donations and lobbying expenditures, and it has not come to particularly strong conclusions. But some of the most dramatic examples of increased corporate sway aren’t directly linked to such spending. The U.S. Supreme Court, for example, has since the 1970s used a novel interpretation of the First Amendment to assert ever-stronger protections for business, as John Coates of Harvard Law School described in an impassioned 2015 essay.

Twelve of the top 100 most-cited law professors of all time teach at Harvard Law School, according to the Social Science Research Network—and professors Lucian A. Bebchuk and Steven Shavell took the first two spots. An electronic service that aims to make research papers and scholarly articles easily accessible, the SSRN contains over 650,000 documents by more than 360,000 authors...“The rankings reflect the significant impact that the Harvard Law School faculty has on policy research and the legal academy,” Bebchuk wrote in an email. Law Professor Cass R. Sunstein ’75, who ranks in fourth place with 1,484 citations, said he thinks there is a significant benefit to publishing work on SSRN. “I think it’s a good thing if you have a paper that’s published and that could benefit from the comments and criticisms of others,” Sunstein said...The list also includes Law professors Louis Kaplow, Reinier H. Kraakman ’71, Mark J. Roe, Jesse M. Fried ’86, Alma Cohen, Allen Ferrell, John Coates IV, Oren Bar-Gill, and J. Mark Ramseyer.

Companies that keep control by giving public investors little to no say in board elections and other matters shouldn’t be allowed to call the shares they sell common stock, according to a panel advising the Securities and Exchange Commission...“If you take a security public and it has zero voting rights, I don’t think that’s common stock anymore,” Harvard Law School professor John Coates said at a committee meeting Dec. 7. Coates, a member of the committee, said the SEC’s staff “ought to think carefully” about when the label applies.