ALPEREN GÖZLÜGÖL, Leibniz Institute for Financial Research SAFE
Email: gozlugol@safe-frankfurt.de

The practices of corporate controllers to divert company value to themselves at the expense of (minority) shareholders and creditors (tunnelling) present a continuing challenge for lawmakers to address. While there is a variety of ways to control self-dealing in public companies, one less studied and appreciated lever against value-diversion is the role of lenders of such companies. This article examines the lending arrangements and common contractual provisions (undertakings, (non-)financial covenants, restrictions), and argues that such arrangements have considerable potential to monitor, deter and restrain value-diversion via self-dealing in the debtor companies. Likely limits to such a potential, and various important factors are also examined. The study concludes with possible implications of such findings.

ANDREW SCHMULOW, University of Wollongong, School of Law, Clarity Prudential Regulatory Consulting Pty Ltd, Oliver Schreiner School of Law, Centre for International Trade
Email: andyschmulow@icloud.com

ASIC's new leadership is giving mixed signals.

FREDERICK TUNG, Boston University School of Law
Email: fredtung@bu.edu

It was once conventional wisdom that lenders routinely influenced corporate managers’ decision making. Covenants constrained borrower risk taking and compelled specific affirmative obligations to protect lenders. Recent policy discussion, however, laments loan markets’ turn to various forms of high-risk lending. So-called leveraged loans— relatively risky, below-investment-grade loans—more than doubled in outstanding dollar terms, growing from about $550 billion in 2010 to $1.2 trillion by 2019. These risky loans have taken up a larger and larger share of the loan markets over time. More leveraged loans are also “covenant-lite,” issued without traditional financial maintenance covenants. And regulators worry about “add-backs”—borrowers’ growing practice of making upward adjustments to projected earnings that tend to weaken leverage constraints.

Moreover, bank regulatory changes have incentivized “originate-to-distribute” loan syndications that enable non-bank lenders to hold and trade leveraged loans too risky for banks to keep. Syndicated lending now involves greater and greater participation by non-bank or “institutional” lenders like hedge funds, CLOs (collateralized loan obligations), and mutual funds. Commentators worry about the new species of risky loans, with their dearth of traditional covenants and the fewer instances of lender intervention, which may portend instability in debt markets. At the same time, weakened covenant protections may lead to weakened corporate governance.

In this Article, I respond to these fears, arguing that they may be somewhat overblown. The increasing share of leveraged and covenant-lite loans may not necessarily evidence undisciplined debt issuance. Many seemingly troublesome loans are issued as subparts of deals that include loans with traditional covenants and cross-default provisions, which effectively constrain borrower behavior. Though add-backs typically increase firm leverage—which is worrisome—they may also improve the informativeness of earnings- based financial covenants. In addition, while the incidence of loan covenant violations has dropped dramatically across U.S. public firms, recent research suggests that covenants have become more efficient. In effect, covenants are doing more with less. Financial covenants have generally become less restrictive and more discriminating in differentiating distress from non-distress situations.

ANDREW N. VOLLMER, Mercatus Center at George Mason University
Email: andrew.vollmer@gmail.com

The SEC recently brought an enforcement case under Rule 10b-5 against defendants alleged to have submitted false records to administrators of distribution funds set up to make payments to victims of securities violations. The court should dismiss the case. It fails to meet one of the essential elements of a claim under Rule 10b-5: misconduct “in connection with the purchase or sale of any security.” The alleged actions of the defendants did not coincide with a securities transaction. Fraud on a distribution fund is not securities fraud.

URI BENOLIEL, College of Law & Business
Email: ubenoliel@gmail.com

Given the significant social benefits of the big data revolution, an important empirical legal question arises: Are government-mandated disclosures designed in a way that allows society to harness the power of the big data that they include?

Mandated disclosures normally include an overwhelming volume of data that can be hardly read and understood by an individual consumer. However, if the voluminous data included in the disclosures is machine-readable, i.e., it can be automatically extracted and processed by computers, disclosures can ultimately assist consumers in making better-informed buying decisions.

While the level of readability of disclosures by humans has been extensively studied by legal scholars, their machine readability has not. This Article aims to fill this research gap. Focusing as a case study on the important U.S. quick service restaurant franchise industry, this Article examines whether disclosure documents, provided by franchisors to prospective franchisees, have the features of machine-readable data. It specifically tests whether disclosures are provided in an adequate digital format, and include unique data identifiers, structured format and standardized taxonomy, which can be easily read and processed by computers. The sample of this study includes the financial balance sheets disclosed by 100 dominant quick service restaurant chains, including Subway, McDonald's, KFC, and Dunkin'.

The disturbing empirical results of this study indicate that franchise disclosures are normally non-machine readable. Given these results, the Article presents concrete recommendations to policy makers on how to assure that disclosures in all industries keep up with the big data revolution.

RUPERT MACEY-DARE, University of Oxford - Saint Cross College, Middle Temple, Minerva Chambers
Email: rmaceydare@dr.com

This paper considers some potential