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Abstract:
A demanding system of mandatory disclosure, which has become more demanding in the wake of the Sarbanes-Oxley Act of 2002, makes up the core of the federal securities laws. Securities regulation is motivated, in large part, by the assumption that more information is better than less. After all, "sunlight is said to be the best of disinfectants; electric light the most efficient policeman." But sunlight can also be blinding. Two things are needed for a regulatory regime based on disclosure, such as the federal securities laws, to be effective. First, information has to be disclosed. Second, and often overlooked, is that the users of the information - for example, investors, securities analysts, brokers, and portfolio managers - need to use the disclosed information effectively. Securities regulation focuses primarily on disclosing information, and pays relatively little attention to how the information is used - namely, how do investors and securities market professionals search and process information and make decisions based on the information the securities laws make available? Studies making up the field of behavioral finance show that investing decisions can be influenced by various cognitive biases on the part of investors, analysts, and others. This Article focuses on a related concern: information overload. An extensive psychology literature shows that people can become overloaded with information and make worse decisions with more information. In particular, studies show that when faced with complicated tasks, such as those involving lots of information, people tend to adopt simplifying decision strategies that require less cognitive effort but that are less accurate than more complex decision strategies. The basic intuition of information overload is that people might make better decisions by bringing a more complex decision strategy to bear on less information than by bringing a simpler decision strategy to bear on more information. To the extent that investors, analysts, and other capital market participants are subject to information overload, the model of mandatory disclosure that says more is better than less may be counterproductive. This Article considers the phenomenon of information overload and its implications for securities regulation, including the possibility of scaling back the mandatory disclosure system.

information overload, securities regulation, Sarbanes-Oxley, mandatory disclosure, corporate governance, efficient capital market hypothesis, behavioral finance, behavioral law and economics, cognitive psychology, bounded rationality

Abstract:
This article focuses on potential causes of CEO overconfidence, a problem that to date has not been central to corporate governance. Instead, corporate governance has focused on solving conflicts of interest and on motivating managers to work hard; it has not emphasized the need to remedy the kind of good faith mismanagement that results when CEOs are overconfident, although well-intentioned and hard working.

I theorize that CEO overconfidence is a product of corporate governance in two key ways. First, high executive compensation gives positive feedback to a CEO and signals that the chief executive is a success. Studies show that positive feedback and recent success build confidence. Indeed, the very process of winning the tournament to become the top executive probably makes a CEO more confident. Stressing the possible link between CEO pay and CEO overconfidence offers a new behavioral approach to executive compensation that emphasizes the psychological consequences of executive pay - namely, the risk of bad business decisions, particularly overinvestment, rooted in growing CEO confidence - as opposed to the incentive effects or fairness concerns associated with how and how much CEOs are paid. Second, a CEO-centric model of corporate governance is predominant in the U.S. as boards, subordinate officers, gatekeepers, judges, and shareholders largely defer to the chief executive, even in the Sarbanes-Oxley era. My theory is that CEOs become more confident as a result of the great deal of corporate control that is concentrated in their hands and the fact that their business judgment is largely deferred to, even as conflicts of interest, disloyalty, and fraud are more carefully monitored.

I conclude by considering how corporate governance could incorporate techniques for managing CEO overconfidence, chief among them being efforts to ensure that the CEO and the board of directors consider the opposite (i.e., arguments against some course of action). One possibility is to appoint a chief naysayer whose job is to be a devil's advocate. This article also addresses what managerial overconfidence might mean for defensive tactics to hostile takeovers and for derivative lawsuits brought by shareholders, as well as for the law of fiduciary duty and the business judgment rule, exploring the possibility of extending the law of fiduciary duty to cover mismanagement that is rooted in managerial overconfidence.

The general message of this article is that in the future, corporate governance should move beyond managerial motives to account more for human psychology and how managers actually behave and make business decisions, including when they are trying to do their best.

chief executive officer, CEO, agency costs, behavioral corporate finance, behavioral finance, executive compensation, Sarbanes-Oxley, devil's advocate, fiduciary duties, business judgment rule, mergers and acquisitions, winner's curse, hubris hypothesis, empire building, psychology

Abstract:
This short Essay addresses three topics on one aspect of the hedge fund industry - the SEC's recent efforts to regulate hedge funds. First, this Essay summarizes the regulation of hedge funds under U.S. federal securities laws insofar as protecting hedge funds is concerned. The discussion highlights four basic choices facing the SEC: (1) do nothing; (2) substantively regulate hedge funds directly; (3) regulate hedge fund managers; and (4) regulate hedge fund investors. Second, this Essay addresses the boundary between market discipline and government intervention in hedge fund regulation. To what extent should hedge fund investors be left to fend for themselves? Third, this Essay highlights two factors impacting regulatory decision making that help explain why the SEC pivoted in 2004 to regulate hedge funds when it had abstained from doing so in the past. These two factors are politics and psychology.

hedge funds, Securities and Exchange Commission, SEC, market discipline, behavioralism, psychology, political economy

Abstract:
The Sarbanes-Oxley Act of 2002, which Congress overwhelmingly passed, is proving to be the most important federal corporate governance and securities legislation in seventy years. The debate rages on over whether Sarbanes-Oxley's substantive requirements are good policy that will result in better corporate governance and corporate performance over the long haul. Whatever else one might think of Sarbanes-Oxley, though, a strong regulatory response from Congress was needed on the heels of Enron, WorldCom, and a collapsing stock market to boost investor confidence. Although portions of Sarbanes-Oxley received careful attention in their crafting, much of the legislation was drafted hastily and under intense political pressure. In the overall haste to get something done, Congress focused on specific aspects of corporate governance and the federal mandatory disclosure system and in many instances, simply called for more disclosure. What Congress did not have the time to do was study the mandatory disclosure system more comprehensively. This matters, because federal securities regulation is best understood as a complex system and not as a bunch of independent parts that can be tweaked or even overhauled on a one-off basis to create an effective regulatory regime. The goal of the symposium for which this foreword was written was to take a step in the direction of a comprehensive review of the mandatory disclosure system in the aftermath of Sarbanes-Oxley. The symposium focused on three key aspects of mandatory disclosure: (1) what should be disclosed and how; (2) how should compliance with the federal securities laws be ensured; and (3) should issuers have more choice among competing regulatory regimes. The symposium benefited from the written contributions of Jim Cox, Jonathan Macey, Kathleen Brickey, Kim Krawiec, Stephen Cutler, Hillary Sale, Murray Weidenbaum, Joel Seligman, and Troy Paredes. It is still to early to tell what the net impact of Sarbanes-Oxley will be. The true test of the legislation will not come until the markets and regulators become lax during the next bull market. The hope, though, is that by having routinized a host of new governance and disclosure practices, Sarbanes-Oxley will prevent a wave of scandal from spreading throughout the markets next time.

Abstract:
The law matters thesis, spearheaded by the work of La Porta, Lopez-de-Silanes, Shleifer, and Vishny, offers one important explanation for the development of thick equity markets - namely, strong legal protections that shield shareholders from insider abuses and expropriation. Assuming that law does matter, the question for developing countries is, What law? As is often the case, when considering corporate governance reforms in developing countries, attention shifts to the U.S. The U.S., after all, has the world's thickest stock markets, even after the scandals at Enron, WorldCom, and elsewhere. But is transplanting U.S. corporate governance to developing countries likely to promote equity markets and economic growth there? Put differently, to what extent should the government displace private ordering with more substantive regulation of corporate governance in developing countries? In this essay, I conclude that in most instances, developing countries should adopt a mandatory model of corporate governance, as compared to the enabling market-based approach that the U.S. (i.e., Delaware) has opted for.

Comparative corporate governance, mandatory corporate law, Delaware, venture capital, transplant effects

Abstract:
In a controversial move in late 2004, the Securities and Exchange Commission (SEC) decided to require hedge fund managers to register with the agency as investment advisers. Until then, the SEC had largely refrained from ramping up hedge fund regulation, even after the collapse of Long-Term Capital Management in 1998.

Although this article takes some issue with the SEC's decision to regulate hedge funds, its primary focus is not on the particular costs and benefits of regulating hedge funds. The inquiry is broader: what can we learn generally about SEC decision making and securities regulation from the SEC's decision to regulate hedge funds now by subjecting fund managers to the registration requirements of the Investment Advisers Act? Since the SEC consciously shifted direction in deciding to regulate hedge funds - and in doing so overstepped the traditional boundary of securities regulation by looking past the ability of sophisticated and wealthy hedge fund investors to protect themselves - the hedge fund rule prompts reconsideration of SEC decision making, particularly in the aftermath of Enron and the other recent corporate scandals that marked the early 2000s.

Although nobody knows for sure what motivates a regulator, the SEC's decision to adopt its new hedge fund rule is consistent with two views - one political; the other, psychological. First, the SEC did not want to get caught flat footed and embarrassed again, as it had been by Enron, WorldCom, the mutual fund abuses, and securities analyst conflicts of interest; and second, after the earlier scandals, the risk of fraud and other hedge fund abuses weighed disproportionately on the agency, prompting it to act when it had not in the past. The particular concern is that such political and psychological influences result in overregulation.

This article concludes with a suggestion. To mitigate the risk of overregulation, the SEC should increasingly consider using default rules instead of mandatory rules. Defaults at least give parties a chance to opt out if the SEC goes too far. Indeed, in some cases, perhaps the SEC could exercise an even lighter touch and simply articulate best practices.

Securities and Exchange Commission, SEC, securities regulation, hedge funds, administrative law, securities markets, default rules

Abstract:
Controversies often arise at the interfaces where intellectual property ("IP") law meets other topics in law and economics, such as property law, contract law, and antitrust law. Participants in the debates over how to mediate these interfaces often view each interface as a special case deserving unique treatment under the law. The doctrines of copyright and patent misuse are cases in point: they graft select antitrust principles onto copyright or patent law, even though there is an entirely distinct body of law - antitrust law - designed to deal with the putative concerns about competition that allegedly give rise to misuse. In this essay, we argue that a better approach for mediating disputes at the periphery of IP law focuses on what we term the "basics" - or core principles and features - of each area of law, and rarely requires specialized frameworks. For example, according to our "basics matter" approach, there is no need to create special doctrines or approaches to address issues relating to matters such as price discrimination or restrictive licensing arrangements involving IP. Rather, analyzing the legality of such arrangements simply requires one to look to the basics of substantive IP law, antitrust law, and what some people call the "general law" - property law, contract law, and the like. Applying the basics of each area of the law gives us a workable - and more predictable - framework of analysis than creating one - with more specialized approaches, such as the doctrines of copyright or patent misuse, using the basics results in easier to apply rules for resolving disputes that transacting parties can better understand and rely on in advance. By reducing legal uncertainty, the "basics matter" approach facilitates the ex ante coordination necessary to promote innovation through the commercialization of the inventions, symbols, and creative works that are protected by patents, copyrights, and trademarks - the entire goal of IP law and an important goal of antitrust law.

Intellectual property, antitrust, patent, trademark, copyright, property, contract, innovation, invention, law and economics, misuse

Abstract:
Promoting economic growth in developing countries is a daunting task. To be sure, economic prosperity depends on a host of economic, political, social, geographic, historical, and cultural factors. In recent years, a rich literature has developed focusing on one important factor - capital markets. A link has been shown between capital markets and economic growth, as one might suspect. The question, then, is what accounts for the development of capital markets, including thick equity markets in which ownership and control separate. The "law matters" thesis, spearheaded by the work of La Porta, Lopez-de-Silanes, Shleifer, and Vishny, offers one important explanation - namely, that the law plays a central role in the development of securities markets by protecting shareholders (and creditors) from insider abuses and expropriation, thereby encouraging investment. Assuming that law does matter, the question for developing countries is, "What law?" As is often the case, when considering corporate governance reforms in developing countries, attention shifts to the U.S. The U.S., after all, has the world's thickest securities markets. But is transplanting U.S. corporate law to developing countries likely to promote securities markets and economic growth there? Put differently, to what extent should the government displace private ordering with more substantive regulation of corporate governance in developing countries? In evaluating these questions in this article, I conclude that in most instances, developing countries should adopt a mandatory model of corporate governance, as compared to the enabling market-based approach that the U.S. (i.e., Delaware) has opted for. The article concludes by outlining what such a mandatory regime might look like.

transplant, mandatory, enabling, corporate governance, corporate law, law matters, comparative law, comparative corporate governance, securities regulation, Delaware, economic growth, developing countries, capital markets

Abstract:
Like much of life, corporate governance is about control. One of the most interesting and controversial subjects in corporate law concerns the market for corporate control - the buying and selling of companies. Should boards have the authority to fend off hostile takeover attempts, including the right to "just say no," or should target shareholders have the right to decide whether or not to sell the company to a willing buyer, overriding the board's objections? After nearly twenty years of doctrinal developments since the landmark Unocal case, the Delaware Supreme Court and the Delaware Chancery Court continue to struggle with the proper role of directors and shareholders in responding to a bid for the company. Lawyers, investment bankers, corporate executives, directors, shareholders, and legal scholars also remain unclear about the extent to which directors can impede the decision of shareholders to sell to a bidder. The Delaware Supreme Court's most recent takeover decision, Omnicare, Inc. v. NCS Healthcare, Inc., seems to confuse things only more.

This Article offers a model of Delaware takeover law that explains how the leading Delaware Supreme Court takeover cases fit together. Instead of looking at takeover law through the lens of fiduciary duty, this Article's "control-based" approach to Delaware takeover law relies on the theory of the firm, as well as positive corporate law, to understand how control is allocated between the board and shareholders. At bottom, there are separate spheres of board (managerial) control and shareholder (residual) control. The takeover decision occurs at the intersection where board and shareholder control meet and in fact overlaps both spheres. One might think that shareholders have an absolute right to sell to a bidder, since alienability is a characteristic feature of ownership. However, the fact that a shareholder quite literally owns her shares is not enough to resolve the debate over defensive tactics, because the sale of the company can significantly impact the target's corporate strategy, over which the board exercises authority. According to the "control-based" model of takeover law, the extent to which target directors can adopt defensive tactics depends on whether the takeover attempt primarily implicates board control or shareholder control - in other words, on whether the bid raises matters of corporate policy and strategy sufficient to justify the board in blocking shareholders from selling. This general framework is then applied to explain how the leading Delaware takeover cases fit together and sheds light on two particularly important questions: first, what triggers Revlon; and second, can target boards "just say no"? The paper concludes with a blueprint for the future development of Delaware takeover law in a way that would ultimately lead to more shareholder choice and limits on defensive tactics.

Takeovers, market for corporate control, mergers and acquisitions, Delaware, proxy contests, theory of the firm, Unocal, Revlon, defensive tactics, fiduciary duty, shareholder choice

Abstract:
Like much of life, corporate governance is about control. One of the most interesting and controversial subjects in corporate law concerns the market for corporate control - the buying and selling of companies. Should boards have the authority to fend off hostile takeover attempts, including the right to "just say no," or should target shareholders have the right to decide whether or not to sell the company to a willing buyer, overriding the board's objections? After nearly twenty years of doctrinal developments since the landmark Unocal case, the Delaware Supreme Court and the Delaware Chancery Court continue to struggle with the proper role of directors and shareholders in responding to a bid for the company. Lawyers, investment bankers, corporate executives, directors, shareholders, and legal scholars also remain unclear about the extent to which directors can impede the decision of shareholders to sell to a bidder. The Delaware Supreme Court's most recent takeover decision, Omnicare, Inc. v. NCS Healthcare, Inc., seems to confuse things only more.

This Article offers a model of Delaware takeover law that explains how the leading Delaware Supreme Court takeover cases fit together. Instead of looking at takeover law through the lens of fiduciary duty, this Article's "control-based" approach to Delaware takeover law relies on the theory of the firm, as well as positive corporate law, to understand how control is allocated between the board and shareholders. At bottom, there are separate spheres of board (managerial) control and shareholder (residual) control. The takeover decision occurs at the intersection where board and shareholder control meet, and in fact overlaps both spheres. One might think that shareholders have an absolute right to sell to a bidder, since alienability is a characteristic feature of ownership. However, the fact that a shareholder quite literally owns her shares is not enough to resolve the debate over defensive tactics, because the sale of the company can significantly impact the target's corporate strategy, over which the board exercises control. According to the "control-based" model of takeover law, the extent to which target directors can adopt defensive tactics depends on whether the takeover attempt primarily implicates board control or shareholder control - in other words, on whether the bid raises matters of corporate policy sufficient to justify the board in blocking shareholders from selling. This general framework is applied to explain how the leading Delaware takeover cases fit together and sheds light on two particularly important questions: first, what triggers Revlon; and second, can target boards "just say no"? The paper concludes with a blueprint for the future development of Delaware takeover law in a way that would ultimately lead to more shareholder choice and limits on defensive tactics.

takeovers, unsolicited offers, theory of the firm, Unocal, Revlon, corporate control, Delaware, corporate law, just say no, shareholder choice

Abstract:
Corporate control is the central concern of corporate law, and, in addition to priority, has become a core concern of bankruptcy. The question of corporate control in bankruptcy is especially important for intellectual property ("IP") rights. Bankruptcy proceedings do not compromise fundamentally the value of most tangible assets. Tangible assets generally retain their value both during and after bankruptcy proceedings, although there is always the risk that the business will be run poorly. IP is different. IP rights are typically most valuable when they carry a credible threat of injunction. As a result, to the extent the delay and coordination problems of bankruptcy lead to the under-enforcement of a debtor's IP rights - or simply to the impression of under-enforcement - bankruptcy can frustrate the important coordination benefits IP rights otherwise serve. The bankruptcy process itself potentially can erode the private value of IP to a firm and all of its constituencies, as well as the public value of IP in facilitating downstream commercialization of the subject matter IP otherwise protects. To ensure that a debtor's IP rights are enforced vigorously in bankruptcy, a party with the right incentives, information, and resources, as well as with standing to sue, must have control over IP assets in bankruptcy.

A prepackaged bankruptcy or an assignment of a debtor's IP assets for the benefit of its creditors might mitigate the delay and coordination problems of bankruptcy. Borrowing from structured finance, we explore a different option: the creation of a bankruptcy-remote special purpose entity ("SPE") to which a company transfers all or part of its IP assets to ensure that the assets do not become part of the company's bankruptcy estate when and if the company is ever in bankruptcy. A properly structured "IP SPE" would have the critical attribute that a holder of IP must have to ensure the value of the IP: the credible perception by all market players that the SPE can enjoin infringers of, as well as transact over, the IP. The sort of "IP securitization" that we outline is very similar in structure to a traditional asset securitization.

One of the principal normative criticisms of the IP securitization structure, as we propose it, is that the structure might accelerate what some might see as the death of legal liability by removing assets from the reach of a debtor's creditors in bankruptcy. Accordingly, in addition to outlining the IP securitization structure, this Essay briefly explores how the death of legal liability may be exaggerated and how concerns over the death of legal liability may be overstated. More to the point, in some instances, IP securitization may best ensure the value of IP assets to the benefit of a debtor's creditors and other constituencies.

Intellectual Property, Corporate Control, Bankruptcy, Property

Abstract:
The problems of the intellectual property ("IP") anticommons are infamous. Many people fear that the potential for vast numbers of IP rights to cover a single good or service will prevent an enterprise from even attempting to launch a business for fear of being unduly taxed or retarded or simply held up. This Article offers a solution based on private ordering within the context of existing laws. This approach uses a limited liability entity structured so that IP owners are given an actual stake in the operating business and thus an incentive to participate in the enterprise; and yet at the same time, the IP owners face a number of constraints that mitigate their interest in acting opportunistically by holding out. Through careful attention to IP owner payoffs and self-restraint, the proposed structure is designed to coordinate behavior among relevant IP owners, thus overcoming the anticommons problem. This approach is designed to help lawyers serve their role as transaction cost engineers who can structure relationships in ways that get deals done.

Intellectual Property, Anticommons, Patent

Abstract:
This Essay surveys recent developments across the fields of finance and innovation to highlight some common themes concerning the importance of property rights to economic success. Society regularly makes choices when shaping the precise contours of the legal institutions that govern the behavior of market actors, often in response to high profile issues like the collapse of Enron and the patenting of life-saving AIDS drugs. Recognizing that no set of legal institutions or related enforcement mechanisms will be perfect, this Essay explores some particularly helpful institutional features based on property rights that too often are overlooked by policy makers and commentators, even though these property-based institutional features have long been associated with economic success in a number of diverse settings.