Redemption Rights Research Articles

Comparative Analysis of Redemption Rights in Secured Transactions: The SARFAESI Act vs. Transfer of Property Act in India

Comparative Analysis of Redemption Rights in Secured Transactions: The SARFAESI Act vs. Transfer of Property Act in India

Harnessing the overconfidence of the crowd: A theory of SPACs

In a SPAC transaction, a sponsor raises financing from investors using redeemable shares and rights. When investors are sophisticated, these features dilute the sponsor's stake and can lead to underinvestment in profitable targets. However, when investors are overconfident about their ability to respond to interim news, the optionality in such features is overpriced, and SPACs can lead to over-investment in unprofitable targets. Consistent with empirical evidence, the model predicts different returns for short-term and long-term investors and overall underperformance. While some policy interventions (e.g., eliminating redemption rights, limiting investor access, and restricting warrants) improve returns for unsophisticated investors, others (e.g., increased disclosure) can be counterproductive.

The relevance of investor rights in crowdinvesting

A common assumption is that entrepreneurs retain more control of their venture when opting for crowdinvesting rather than venture capital. In this article, we investigate the relevance of cash-flow, control, and exit rights awarded to crowd investors in Germany, where more flexible contracts are offered than in many other jurisdictions. In Germany, many of the rights used in venture capital investment contracts are also prevalent in crowdinvesting contracts. We find that crowd investors are asked to pay higher prices if they receive more cash-flow and exit rights, consistent with the view that these rights are valuable to the crowd. However, we find no evidence that these rights affect campaign outcome, the likelihood of securing follow-on funding, or the insolvency likelihood of the venture. We interpret this as evidence that the redemption rights stipulated in the contract make other types of control rights less relevant or investors' actions are ineffective. Furthermore, crowd investors neither trigger insolvency proceedings nor mention the enforcement of their contractual rights in investor communication blogs or popular media.

Statutory right of redemption and its influence on defaulted mortgage outcomes

Abstract This paper provides empirical evidence that a strong statutory right of redemption leads to a statistically significant and an economically large impact in reducing bankruptcy filings. Under the statutory right of redemption, borrowers can repurchase the property after the foreclosure auction at a certain price. Implementations of the statutory right of redemption, however, vary substantially among states. When categorizing the redemption rights from an economic perspective, we find that a strong redemption right leads to a greater than 30% decrease in the odds that a borrower with a defaulted mortgage will file for bankruptcy.

Does Diversification of Share Classes Increase Firm Value?

Firms can issue stocks classified in many ways, including in terms of voting rights, dividend rights, redemption rights, and conversion rights. This study investigates the desirability of giving firms greater freedom to choose their share classes. Making use of the setting created by the 2011 Commercial Act amendment that significantly relaxed regulation over share classes in Korea, we study the motivation behind and the effect of adopting two newly emergent classes: preferred stocks convertible to voting stocks at the discretion of management and preferred stocks redeemable at the discretion of investors. We find that firms adopt the former for managerial entrenchment purposes and destroy firm value, while firms adopt the latter in times of financial constraint but fail to arrest the decline in firm value.

The Case for Non-Binary, Contingent, Shareholder Action

Shareholder action is exercised mainly through a binary system: for example, the shareholders vote either to approve a proposal or to reject it. They either follow the recommendation of management and vote with management or vote against it. In case of contention between incumbents and insurgents, shareholders need to determine whom to trust. Disclosures and proxy advisory firms’ recommendations add to the information the shareholders might consider before casting their binary vote. However, retail investors as well as small investors are generally underequipped and restricted economically from reaching an informed and educated shareholder decision, and thus vote infrequently. Abuse of insider information further disadvantages retail investors. Yet, corporate decisions are based on the choice of the majority of the shareholder vote and retail investors are assumed to rely on disclosed information when making investment decisions. The new generation of Special Purpose Acquisition Companies (SPACs), currently representing about half of the U.S. going-public transactions, is one example that illustrates the weakness of the binary system and the consequent vulnerability of small and unsophisticated shareholders. Remarkably, investors in SPACs can vote yes on management proposed acquisition transactions and, nonetheless, simultaneously choose to redeem their shares. Unsophisticated retail investors may not realize that they, as well, will be better off if they redeem their shares even though the transaction received the approval of the majority of the shareholder vote. This Article puts forward a proposal to amend the law and allow shareholders to act in a way that is contingent upon a simultaneous non-contingent action by other shareholders. For example, a shareholder of a SPAC should be able to choose to redeem her shares iff at least a specified percentage of redemption rights are exercised unconditionally. Similarly, a shareholder who has preemptive rights should have the right to exercise her rights with a limit that caps her participation and maintains her percentage holdings in the company. Generally, shareholders should have the option to act contingently when they are exercising a shareholder right, such as preemptive rights, appraisal rights, and when they are given a choice to participate in transactions such as tender offers and stock-buybacks. Unlike mandatory disclosure rules imposed on insiders, the proposed non-binary, contingent, shareholder action treats all shareholders equally and increases the power of the shareholder's action without incurring high costs of collaboration and communication among the shareholders..

Does Diversification of Share Classes Increase Firm Value?

Firms can issue stocks classified in many ways. They can be classified in respect to voting rights, dividend rights, redemption rights, conversion rights, and many others. In this study, we ask if it is desirable to give greater freedom to firms in their choices of class shares. Making use of the 2011 Commercial Act amendment that significantly relaxed the regulation on class shares in Korea, we study the motivation and the effect of adopting two newly emerged class shares – preferred stocks convertible to voting stocks at the discretion of management and preferred stocks redeemable at the discretion of investors. We find that firms adopt the former for managerial entrenchment purpose and destroy firm value by doing so. As for the latter, we find that firms adopt them in times of financial distress but fail to stop the downfall in firm value by doing so.

REDEMPTION RIGHTS FOR ACQUISITION OF NEW EMISSION AS A MEANS OF CORPORATE MANAGEMENT

Introduction. There are cause-effect persistent relationships between the quality of corporate management of an enterprise and its ability to attract investments. Among the wide range of issues related to the definition of "corporate management", the least investigated is the means of redemption rights to purchase shares of new emission. The level of protection of investors’ rights depends directly on its capacity, and hence the investment attractiveness of individual enterprises and the capital market of the country. Purpose of the study is to substantiate the recommendations on the practical implementation of the redemption rights of shareholders to purchase shares of new emission. Methods. In order to create the conditions for the practical implementation of the redemption rights, the model of calculating the domestic fair value of redemption rights is substantiated. This model takes into account the following factors: market share price before additional emission, emission rate, emission and cash flows ratio which will be generated by the company owing to the emission results. It is a model for determining the minimum amount of additional cash flow, which should be generated by a company that carries out an additional share emission in order to preserve the market rate that took place before the increaseof the statutory capital, is offered. Results. The work emphasizes that redemption rights (for the purchase of shares) is a means against blurring the value share of individual shareholders, its devaluation and compensation of owners’ losses. The financial aspects of implementation of redemption rights, in particular, their price, fair value and influential factors are analyzed. If the share emission is low, the "blurring" of the market value of the shares in circulation and losses of shareholders will be high. The task of determining the fair value of redemption rights in the article was solved on the basis of comparing the market value of the company to the increase of the statutory capital and potential market capitalization after the additional share emission. Conclusions. It is shown that as a result of implementation of redemption rights, shareholders do not receive real additional income and increase of their assets. To compensate the shareholders losses related to the additional share emission, the necessity to permit the trade of redemption rights and the tax exemption from the sales revenue of these rights is substantiated.

Mutual Funds As Venture Capitalists? Evidence from Unicorns

Using novel contract-level data, we study the recent trend in open-end mutual funds investing in unicorns—highly valued, privately held start-ups—and the consequences of mutual fund investment for corporate governance provisions. Larger funds and those with more stable funding are more likely to invest in unicorns. Compared to venture capital groups (VCs), mutual funds appear to have weaker cash flow rights and to be less involved in terms of corporate governance, being particularly underrepresented on boards of directors. Having to carefully manage their own liquidity pushes mutual funds to require stronger redemption rights and eschew “pay-to-play” provisions, suggesting contractual choices consistent with mutual funds’ short-term capital sources.

Pre-Emption, Back-In And Redemption Rights As Well As The Right Of Priority In Acquisition Of Real Estate

Abstract Among factors that might significantly diversify common and economic trading, in particular trading in real estate, pre-emption, back-in and redemption rights, as well as the right of priority in acquisition play an important role. These legal instruments, despite certain differences in their legal structures, serve a similar function. Namely, they may be utilized for the purpose of affecting the preferred ownership structure. The legislator in pursuit of the assumed ownership structure may – through the instruments of the pre-emption right, back–in right, redemption right and the right of priority in acquisition – particularly with their statutory character - restrict freedom to trade in ownership with regard to the selection of the real estate purchaser. Simultaneously, in the contracting process, the parties face a certain manner of proceeding imposed, the purpose of which is to conclude the contract on transferring real estate ownership with the partner preferred by the legislator. In certain cases, the legislator goes even further, granting the eligible party a claim under which the eligible party may demand that the party obliged shall submit an appropriate declaration of will, and in the event that the party obliged refuses – the eligible party may seek the judgment of the court replacing that declaration. Proper navigation in the field of real estate trading, in particular with regard to transactions in which the pre-emption right, back-in right, and redemption right, or the right of priority in acquisition is reserved for defined entities, requires defining the legal character of the given instrument, the manner of executing the due right by the eligible party, results of the failure of the parties to the contracting process to fulfill the obligations imposed by the act, and finally, defining whether there are means for the compulsory execution of the power guaranteed by the act and, if yes, what these means are.

Disentangling Mutual Fund Governance from Corporate Governance

This Article addresses mutual fund governance, explaining how in recent years it has become entangled with the norms of corporate governance. There are two essential features of mutual funds, however, that differentiate them fundamentally from ordinary corporations. First, mutual funds are not only separate legal entities; they are also financial products (or services). Mutual fund investors are therefore both shareholders and customers. This stands, of course, in marked contrast to ordinary corporations, whose shareholders and customers are two distinct and separate groups. Second, mutual funds are fundamentally different owing to the right of redemption, a right of investors to withdraw their capital. The right of redemption is not only a financial right, it is also essential to the governance of mutual funds, imposing direct discipline upon a fund’s adviser. In contrast, redemption rights are antithetical to the organizing principles of ordinary corporations, whose economic viability in the markets depends upon the ability to lock in shareholders’ capital. This Article examines how recent mutual fund rulemaking by the SEC rests on mistaken comparisons to corporate governance, and makes recommendations as to how the SEC can improve its approach. In particular, this Article proposes that the SEC take steps to allow two new types of mutual funds that can compete in the marketplace alongside traditional mutual funds. One type is the unitary investment fund, which would retain fund boards solely to serve as monitors of fund advisers’ legal and fiduciary duties, while leaving judgments over the competitiveness of an adviser’s fees to the marketplace. The other is a “crowdfunded” mutual fund that would allow for investors themselves, rather than investment advisers, to initiate and organize funds.

Social Hierarchies and the Formation of Customary Property Law in Pre-Industrial China and England

Comparative lawyers and economists have often assumed that traditional Chinese laws and customs reinforced the economic and political dominance of elites and, therefore, were unusually “despotic” towards the poor. Such assumptions are highly questionable: Quite the opposite, one of the most striking characteristics of Qing and Republican property institutions is that they often gave significantly greater economic protection to the poorer segments of society than comparable institutions in early modern England. In particular, Chinese property customs afforded much stronger powers of redemption to landowners who had pawned their land. In both societies, land-pawning occurred far more frequently among poorer households than richer ones, but Chinese customary law allowed debtors to indefinitely retain redemption rights over collateralized property, whereas English debtors would generally lose the property permanently if they failed to redeem within one year. This article argues that the comparatively “egalitarian” tendencies of Qing and Republican property institutions stemmed from the different ways Chinese and English rural communities allocated social status and rank. Hierarchical “Confucian” kinship networks dominated social and economic life in most Chinese villages. Within these networks, an individual’s status and rank depended, in large part, on his age and generational seniority, rather than personal wealth. This allowed many low-income households to enjoy status and rank quite disproportionate to their wealth. In comparison, substantial landed wealth was generally a prerequisite for high status in early modern England, effectively excluding lower-income households from positions of sociopolitical authority. Chinese smallholders possessed, therefore, significantly more social bargaining power, and were more capable of negotiating desirable property institutions. Paradoxically, the predominance of kinship hierarchies actually enhanced macro-level political and economic equality. Category: Comparative Legal History

The Historical Origins of America's Mortgage Laws

This paper examines the different legal frameworks for mortgage markets in different states, focusing on how and when they came into existence, including the British influence on laws in some of the older states, with a particular emphasis on foreclosures, including judicial vs. non-judicial regimes, redemption rights and deficiency judgments. The paper concludes that mortgage laws in America are a patchwork driven by path dependence, rather than a coordinated effort or a reaction to some economic event or condition.

Collective Branding and the Origins of Investment Management Regulation: 1936-1942

This paper examines how market and political forces interacted to create the American mutual fund industry and its regulation between 1936 and 1942. Contrary to previous scholarly work, this paper argues that the key elements of regulation that now differentiate modern mutual funds from modern hedge funds had their origins in lobbying by the mutual fund industry itself, rather than in populist or public-spirited forces in the SEC or the Roosevelt administration. The largest funds desired to maintain an industry-wide brand for a passive, low-risk style of investing and they sought regulation to maintain this brand. They did so even though some investors rationally might have preferred risky or active styles of investing that regulation ultimately prohibited. An understanding of the industry’s brand-building motivations can explain several puzzling features of mutual fund regulation, including restrictions on borrowing, redemption rights and control over portfolio companies. The mutual fund industry was able to achieve strong agreement on how to influence regulation because the industry had grown into its modern shape well before Congress adopted the current regulatory regime. Evidence from mutual funds’ portfolios, for example, shows that no funds that had any chance of being swept up in the mutual fund tax and regulatory regime in the late 1930s had any substantial interest in the governance or control of their portfolio companies. This paper also examines the key distinguishing feature of modern mutual fund taxation - actual, rather than nominal, distribution of income to shareholders - and shows that it may have originated in an attempt by open-end mutual funds to drain assets from closed-end mutual funds.

Claims on Equity: Voting and Liquidity Differentials, Cash Flow Preferences and Financing Rights

In conventional valuation, we assume that all equity claims are identical and divide the value of equity by the number of claims (shares) to get the value per claim (share). In practice, though, claims on equity can vary on a number of dimensions. First, the claim can be a direct and perpetual one (standard equity) or it can be contingent on the value changing (equity option). Second, some equity investors have preferential claims on the cash flows- dividends in some cases and cash flows in liquidation in other cases. Third, some equity claims have superior control rights over other claims: this can take the form of differential voting rights in some cases and a bigger role in board composition and management in others. In some instances, the power is triggered by a control event such as an acquisition or an initial public offering. Fourth, some equity investors are provided with special rights to protect their interests when the firm acts in later periods. These can include disproportionate rights in subsequent financing decisions - the right to partake in the financing at a fixed price, for instance, or veto rights over new financing - as well as redemption rights, where they can reclaim the capital that they have invested. Finally, equity claims can vary in terms of liquidity, with some claims being more marketable than others. All of these differences can affect value, resulting in some equity claims having higher value than others.

Joint Control and Redemption Rights in Venture Capital Contracts

Joint Control and Redemption Rights in Venture Capital Contracts

Joint Control and Redemption Rights in Venture Capital Contracts

In most venture capital financed firms, neither the VC nor the manager has exclusive authority over some of the key corporate decisions. For example: the decision whether the firm should undertake an IPO or be sold to a larger rival usually requires the approval of both the manager and the VC. This contradicts a strong prediction in the theoretical literature that joint control is suboptimal. In this paper, I show that assigning control jointly to both the agents, and specifying a harsh penalty (such as liquidation) if they fail to reach an agreement, is sometimes better than assigning control exclusively to one of the agents. A key factor is the firm's - the difference between its expected cash flows and its required investments and monitoring costs. Joint control is the optimal control allocation when the firm has low financial slack and a reasonable collateral value, and when the VC's liquidity constraints and cost of monitoring the firm are high. Most VC-financed firms fit this description.