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Abstract: As Russia and other formerly socialist states construct market economies, the appearance of strong securities markets remains an unfulfilled expectation. Notwithstanding broad privatization of state-owned enterprises and the elimination of industrial subsidies - essential precursors to demand for capital-raising securities markets - stock markets in Central and Eastern Europe remain illiquid, inefficient, and unreliable. Strong securities markets do not, it seems, neatly follow from the welfare-maximizing behavior of individuals and institutions. Nor can the appearance of securities markets be effectively dictated by government decree. Post-communist securities market transition therefore presents a puzzle: Do markets emerge, or must they be created? Joining the debate over whether "law matters" in the creation of securities markets, this Article draws on recent finance and microeconomic analysis of network effects to propose an alternative theory of why law might matter in the creation of securities markets, and to challenge traditionally limited views of how it matters. After articulating the proposed network model of securities markets, this Article outlines the model's implications for securities market transition. Specifically, it highlights two categories of network inefficiencies that may help explain the persistent weaknesses of securities markets in Russia and other transitional states. The model suggests such inefficiencies may also arise in the modernization of established securities markets, however, implying lessons for the United States and other developed economies as well. Where network effects undermine the spontaneous emergence of strong markets, this Article proposes a limited coordination of market expectations - as distinct from law's demarcation of property rights and enforcement of contracts, as conventionally acknowledged, and its protection of minority investors, as recently emphasized by "law matters" corporate and securities law scholars - as a central role for law in the very creation and design of strong securities markets.
networks, network effects, network externalities, externalities, securities markets, stock markets, equities markets, transition, law matters, preconditions
Abstract: Securities markets are commonly assumed to spring forth at the intersection of an adequate supply of, and a healthy demand for, investment capital. In recent years, however, seemingly failed market transitions - the failure of new markets to emerge and of existing markets to evolve - have called this assumption into question. From the developed economies of Germany and Japan to the developing countries of central and eastern Europe, securities markets have exhibited some inability to take root. The failure of U.S. securities markets, and particularly the New York Stock Exchange, to make greater use of computerized trading, communications, and processing technologies, meanwhile, seems to suggest market resistance to technological modernization. In light of this pattern, one must wonder: How are strong markets created and maintained, and what might be law's role in this process? This Article attempts to articulate a model for understanding the needs of efficient market transition and the resulting role of law in that process. Specifically, it suggests a "cueing" function for law in market transition. Grounded in largely ignored lessons of game theory and microeconomic analysis of so-called network effects, cueing theory identifies the coordination of market participants' expectations as law's central role in market transition. Building on recent legal literature on private regulation, social norms, and the expressive function of law, this theory suggests that in securities market transition - whether it be market creation in central and eastern Europe or market restructuring in the United States - law primarily serves to convene, encourage, inform, and facilitate. A cueing role for law constitutes an important extension of traditional conceptions of what law does, particularly in securities regulation, but in other areas as well. Regulatory cues are neither coercive nor outcome determinative and involve a close intertwining of public and private regulation. The exceptional character of law in this context, and the recent growth in areas where regulatory cues might have fruitful application, may explain why such a role has not previously been analyzed. Yet in securities markets and other industries exhibiting network economies - from electricity transmission and interstate transportation to telecommunications and the Internet - a cueing function for law may be central to efficient transition. It may explain much of why "law matters" in the modern economy.
cueing, cue, focal point, Schelling, expectations, coordination, coordination game, game theory, meeting place, chicken, battle of the sexes, network, network effects, network externalities, norms, social norms, convention, expressive law, private law, private legal systems, regulation, securities, securities regulation, securities market, National Market System, fragmentation, consolidation, centralization, auction, dealer, Central and Eastern Europe, Russia
Abstract: Boilerplate can be exciting. It is this, perhaps hard-to-swallow, proposition that the present analysis attempts to convey. Particularly in invoking the work of Thomas Schelling on the role of focal points in coordination games, it offers what can be characterized as a "strategic" theory of boilerplate, in which boilerplate plays an active, even aggressive, role. Contrary to the relatively inert quality of boilerplate implied by conventional treatments in the legal literature, boilerplate may serve essential signaling and coordination functions in contract bargaining. In appropriate circumstances, its proposed usage may be a valuable weapon in the arsenal of a bargaining party, helping it to secure negotiating advantage and success over its counterparty.
boilerplate, bargaining, strategy, contract, adhesion, standard-form, norm, convention, Schelling, focal point, coordination, signaling, communication, cheap talk, indenture
Abstract: Boilerplate is everywhere. Its use in contracts among unsophisticated parties - and in standard-form contracts between dominant repeat-players and their inexperienced and uncounseled customers - may not be surprising. Yet boilerplate is also pervasive in contracts among sophisticated and recurrent contracting parties, ably represented by well-compensated counsel. While various explanations have been offered for this phenomenon - including transaction cost and network effect theories - the incompleteness of each approach invites further attention to the sources of standardization in contracting. Here, I offer a "strategic" conception of boilerplate in facilitating communication among sophisticated parties. Contrary to our common emphasis on the element of conflict in bargaining, its essential feature is a dynamic of coordination. Given the resulting mixed-motive game, direct communication may not be the primary means of communication in bargaining. Both the use of boilerplate and deviations from it, by contrast, may speak worlds. Perhaps most significantly, for all the sense of "boilerplate" as somehow passive or inert, it may - in appropriate circumstances - constitute an effective weapon in bargaining parties' efforts to advance their contracting interests.
Abstract: Since the very moment of its adoption, the Sarbanes-Oxley Act of 2002 has been subject to a litany of critiques, many of them seemingly well-placed. The almost universal condemnation of the Act for its asserted 'federalization' of corporate law, by contrast, deserves short shrift. Though widely invoked - and blithely accepted - dissection of this argument against the legislation shows it to rely either on flawed assumptions or on normative preferences not ordinarily acknowledged (or perhaps even accepted) by those who criticize Sarbanes-Oxley for its federalization of state corporate law. Once we appreciate as much, we can begin by replacing the misleading rhetoric of 'federalization'. More importantly, we might begin to conceptualize a theory of corporate law that is both more effective in advancing our desired ends and perhaps closer to market realities than the competing paradigms presently in ascendance. In this spirit, I offer a model of jurisdictional redundancy - in which federal mandatory rules intertwine with state enabling rules, to create a more indeterminate regulatory regime than we might otherwise pursue. Such a scheme of 'mixed governance' may deprive legal scholars of the opportunity to draw clear distinctions, but may allow the regulation of corporate governance to operate more effectively, and to evolve more efficiently over time.
Sarbanes-Oxley, federalization, federalism, nationalization, corporate law, regulatory competition, charter competition, public/private, process/substance
Abstract: Among a litany of criticisms of the Sarbanes-Oxley Act, its asserted federalization of corporate law is perhaps the most consistent object of criticism. This is also among the most damning objections to the Act - given its seeming insusceptibility to cure. Here, I attempt to deconstruct the broad rhetoric of this critique. Absent the identification of a consistent line between the realms of corporate law and securities regulation, or some aspiration to diversity in the rules of corporate governance, attacks on Sarbanes-Oxley's federalization of corporate law are not about federal versus state authority, at least in any inherent sense. Nor are they, at heart, about the regulatory benefits of competition. Instead, they reduce to general critiques of the imposition of regulation, where private incentives and the market have previously held sway. Once we appreciate as much, we can begin by replacing the misleading rhetoric of federalization. More importantly, we might start to conceptualize a theory of corporate law that is both more effective in advancing our desired ends and perhaps closer to market realities than the competing paradigms presently in ascendance. In that spirit, I offer a model of jurisdictional redundancy - in which public and private dynamics intertwine, and federal mandatory rules overlap with state enabling rules, to create a more indeterminate regulatory regime than we might otherwise pursue. Such a scheme of mixed governance may deprive legal scholars of the opportunity to draw clean distinctions, but may allow the regulation of corporate governance to operate more effectively, and to evolve efficiently over time.
Abstract: Recent years have seen dramatic growth in the number of international tribunals at work across the globe, from the Appellate Body of the World Trade Organization and the International Tribunal for the Law of the Sea, to the Claims Resolution Tribunal for Dormant Claims in Switzerland and the International Criminal Court. With this development has come both increased opportunity for interaction between national and international courts and increased occasion for conflict. Such friction was evident in the recent decision in Loewen Group, Inc. v. United States, in which an arbitral panel constituted under the North American Free Trade Agreement found a Mississippi jury trial to have been the antithesis of due process. Much of the interaction of courts across national borders - including the citation of foreign legal authority, transnational coordination of complex litigation, and the enforcement of foreign judgments - has been analyzed through the metaphor of dialogue. As suggested by the Loewen case, however, there is a growing pattern of interaction between international tribunals and national courts for which dialogue is an ill-suited analogy. Contrary to conventional expectations of incapacity and restraint in international adjudication, recent interactions between international tribunals and domestic courts incorporate a significant dimension of review in both the literal and figurative sense. Although such review is not appellate in nature, it shares with appellate review some potential to effectuate its mandate without the consent of the court subject to review. This dimension of power further distinguishes emerging cases of international review from transnational dialogue. Standing between the hierarchy of appellate review and the comity of judicial dialogue, such international engagement with national courts represents a distinct pattern of judicial interaction, one I develop and detail as dialectical review. Defined broadly as a hybrid of appellate review and dialogue, the nature of dialectical review can be elaborated by examining other hybrid judicial interactions - federal habeas review of state criminal convictions and appellate courts' use of dicta as a signaling device to lower courts. In each of these cases, a form of dialectical review serves as a mechanism of legal innovation. In the face of accelerating trends of globalization, a pattern of dialectical review among international and national courts can help to facilitate the emergence, evolution, and internalization of universal norms of due process. The present analysis thus offers international and domestic judges as well as policymakers a framework for understanding and facilitating beneficial judicial interaction in an ever-shrinking world.
international, transnational, supranational, trade, investment, investor-state, court, tribunal, arbitration, dialogue, appeal, appellate, review, dialectical, dialectic, NAFTA, Chapter 11, BITs, bilateral investment treaties
Abstract: In this Reply, I respond to comments by Bill Bratton, Larry Cunningham, and Todd Henderson on my recent paper - Trapped in a Metaphor: The Limited Implications of Federalism for Corporate Governance. I begin by reiterating my basic thesis - that state competition should be understood to have little consequence for corporate governance, if (as charter competition's advocates assume) capital-market-driven managerial competition is also at work. I then consider some of the thoughtful critiques of this claim, before suggesting ways in which the comments highlight just the kind of comparative institutional analysis my paper counsels. Rather than a stark choice between a race in one direction or another, institutional design in corporate law requires a more careful analysis of how precisely state competition benefits the modern public corporation, as well as of its resulting limitations.
corporate law, corporate governance, Berle, Means, Cary, Winter, state competition, charter competition, managerial competition, separation of ownership and control, race to the bottom, race to the top, antitakeover, efficient capital markets, managers, federalism
Abstract: In the standard rhetoric of the corporate law literature, federalism is "the genius of American corporate law" - an engine of efficiency, motivating a race (or at least a leisurely walk) to the top. Some have dissented, suggesting that the prevailing wisdom is wrong as to either the direction or the vitality of the promised race. But the latter critiques are too forgiving. The standard account misunderstands the basic question; its answer, as such, is not even wrong. Rather than weighing in on the "race debate," thus, I challenge the fundamentally flawed discourse behind it. I offer a distinct framework for evaluating the role of federalism in American corporate governance, which points to distinct measures of efficiency and a reinvigorated study of institutional design in corporate law. To begin, I challenge the literature's merger of two distinct competitions - state and managerial - into one. More critically, I decry the resulting linkage between corporate law's central goal-efficient regulation of the separation of ownership and control - and the central element of its institutional design - federalism. That rhetorical linkage has led us astray in important respects: First, it has bootstrapped a role for federalism in advancing not merely the quality of corporate law, but also the substantive quality of corporate governance. Second, it has essentialized the role of federalism, casting it as indispensable to the production of good law. Dominant as these conceptions are in the discourse of corporate law, neither is true. I suggest an alternative account of federalism's contribution to American corporate governance. Federalism is not directed to the traditional goal of corporate law - regulation of the vertical separation of ownership and control within the firm. Rather, it advances a distinct, horizontal goal of regulating the relationship of the firm as a whole with state regulators external to it. Given as much, a federal regime is not dictated by a commitment to efficiency in corporate law. Rather, it is an institutional design choice, to be evaluated for its efficacy and utility - as well as its limitations - in one area of corporate law versus another.
federalism, corporate law, corporate governance, separation of ownership and control, agency costs, state competition, interstate competition, charter competition, managerial competition, efficient capital markets, market for corporate control, Berle & Means, Cary, Winter
Abstract: Even after the departure of two of its most prominent advocates - Chief Justice William Rehnquist and Justice Sandra Day O'Connor - the federalism revolution initiated by the Supreme Court almost twenty years ago continues its onward advance. If recent court decisions and congressional legislation are any indication, in fact, it may have reached a new beachhead in the realm of foreign affairs and international law. The emerging federalism in foreign affairs and international law is of a distinct form, however, with distinct implications for the relationship of sub-national, national, and international institutions and interests. This article - prepared for a symposium on Missouri v. Holland - draws on the prism of "coordination," as well as related analysis of standard-setting, to question two conventional assumptions about the relationship of sub-national, national, and international institutions. First, there is the common notion that a coherent foreign affairs regime requires "one voice" to speak for the nation. Second is the perception of some inherent conflict in the interaction of international norms and sub-national interests - a sense of international law as silencing (or at least disregarding) sub-national voices. Familiar as they are, both these claims are wrong. Coordination can be achieved in foreign affairs even with multiple voices. International law, meanwhile, may increasingly offer opportunities for states and localities to be heard. Once we appreciate as much, we can begin to develop a richer account of the interaction of sub-national, national, and international institutions, as "our federalism" reaches abroad.
foreign affairs, international law, federalism, coordination, coordination games, standard-setting, standardization, network, horizontal federalism, Missouri, Holland, one voice, states, localities
Abstract: Even with the departure of two of its most vocal advocates - Chief Justice William Rehnquist and Justice Sandra Day O'Connor - the federalism revolution initiated by the Supreme Court almost twenty years ago continues its onward advance. If recent Court decisions and Congressional legislation are any indication, its latest beachhead may be the realm of foreign affairs and international law. The emerging federalism of foreign affairs and international law is of a distinct form, however, with distinct implications for the relationship of sub-national, national, and international institutions and interests.
In this article, I draw on the prism of "coordination" - as well as related understandings of standard-setting processes - to question two conventional assumptions about the relationship of the sub-national, national, and international: First, the widespread notion that a coherent foreign affairs regime requires a single, national voice. Second, the almost visceral notion of conflict in the interaction of international norms with sub-national interests - a conception of international law as silencing (or at least ignoring) sub-national voices.
Familiar as they are, both these claims are wrong. Coordination can be achieved in foreign affairs even without an exclusive national voice. International law, meanwhile, may increasingly offer opportunities for states and localities to be heard. Once we appreciate as much, we can begin to develop a richer account of the interaction of sub-national, national, and international institutions and interests as "our federalism" reaches abroad.
coordination, international law, foreign affairs, federalism, New Federalism, standard-setting, state and local, sub-national, intersystemic governance, Sudan, SADA, Medellin, Avena, network, horizontal coordination
Abstract: While theories of regulation abound, woefully inadequate attention has been given to growing patterns of "intersystemic" and "dialectical" regulation in the world today. In this rapidly expanding universe of interactions, independent regulatory agencies, born of autonomous jurisdictions, nonetheless face a combination of jurisdictional overlap with, and regulatory dependence on, one another. Here, the cross-jurisdictional interaction of regulators is no longer the voluntary interaction embraced by transnationalists; it is, instead, an unavoidable reality of acknowledgement and engagement, potentially culminating in the integration of discrete sets of regulatory rules into a collective whole. Such patterns of regulatory engagement are increasingly evident, across an array of fields. Under the No Child Left Behind Act, federal and state education officials depend on one another's regulatory initiatives, mandates, and funding commitments in pursuit of their own education goals. Transnationally, the U.S. Comptroller of the Currency must necessarily rely on the initiatives of various transnational and foreign regulators to combat money laundering. Here, I emphasize the experience of the Securities and Exchange Commission in recent years, as it has been forced to engage closely with both its transnational and foreign counterparts, and sub-national regulators seeking to leave their mark on the markets - and perhaps to win their state governorship. For the most part, patterns of intersystemic and dialectical regulation have been resisted, both in the scholarly literature and in practice. This response is hardly surprising. It reflects some visceral sense of law's project as one of categorization, clear definition, and line-drawing. Justice Scalia has spoken of the "Rule of Law" as the "law of rules." The majority in New York v. United States, with its insistence on clear lines of federal and state accountability, spoke in a similar spirit. Yet such devotion to certainty and clarity - whatever its general utility - has minimized our appreciation, let alone embrace, of selective overlap and dependence in the interaction of regulatory entities across jurisdictional lines. While corporate and securities scholars have showered endless attention on the internal affairs doctrine - a doctrine whose essential function is to minimize regulatory overlap and dependence - they have had far less to say about the muddled reality of corporate and securities regulation in practice. In negotiating the overlap of regulatory authority across jurisdictional lines, the traditional lawyerly task has thus been one of line-drawing. A more resonant project might be that of the poet. This project lies not in line-drawing, distinguishing, or simplifying. To the contrary, it explores - and even encourages - overlap, interdependence, and attendant complexity. From this distinct perspective, the goal is not to identify the single regulatory actor best suited or most appropriately charged with responsibility for a given entity or subject matter. Rather, multiple regulators are embraced as having a shared - if both competing and cooperating - place in a more inclusive and all-encompassing regulatory regime.
dialectical, intersystemic, interactive, mixed, regulation, governance, corporate, securities, SEC, Securities & Exchange Commission, Spitzer, IASB, IOSCO, accounting standards, disclosure, mutual funds, analysts, overlap, dependence
Abstract: Legal scholars, as well as economists, have focused limited attention on the role of coordinated groups of market participants - committees, clubs, associations, and the like - in social ordering generally and in the evolution of norms particularly. One might trace this neglect to some presumptive orientation to state actors (expressive law) and autonomous individuals (norm entrepreneurs) as the sole parties of interest in social change. Yet, alternative stories of social ordering and norm change might also be told. Dramatic recent changes in the contracting practices of the sovereign debt markets offer one such story. Using the latter by way of illustration, this essay explores the potential role of groups as mechanisms of norm transformation. In appropriate circumstances, it suggests, groups may offer an intermediate path of change between regulatory mandate and decentralized markets. Where a pattern of private behavior is at once inefficient but resistant to decentralized market change, groups may effectively stand in for the market - relying on private rather than public incentives to define outcomes, yet offering an infrastructure of coordination lacking in a pure market dynamic. Building on this conception, the essay offers a potential framework for the analysis of groups - as market substitutes in their internal dynamics, as market-mediating in their external interactions, and, most counter-intuitively, as contributing to norm change not exclusively through their strength, but also through their weakness.
groups, committees, networks, norms, conventions, change, transformation, transition, standards, standard-setting, cues, cueing, coordination, game theory, expressive law, norm entrepreneurs, network effects, network externalities, sovereign debt, UAC, CAC, contracts, boilerplate
Abstract: Over the last twenty years, law and economics has effectively internalized behavioral critiques of its assumption of individual rationality. By contrast, it has failed to appreciate the implications of growing challenges to the other crucial pillar on which it is built: methodological individualism. Where social norms shape choices, network externalities are strong, coordination is the goal, or knowledge is a substantial determinant of value, a methodology heavily oriented to the analysis of individuals will overlook at least as much as it reveals. Indicia of consent may be given greater weight than they deserve, the evolution of norms may be underemphasized, and the regulation of information and knowledge may be flawed - among other potential distortions. As with the shift to a more careful approach to rationality, then, an appreciation of the limits of methodological individualism promises a richer account of law and economics.
law and economics, individualism, methodological individualism, rationality, neoclassical economics, Austrian economics, social norms, network effects, network externalities, coordination, coordination games, information, knowledge, behaviorial economics, community
Abstract: At heart, this introductory essay aspires to encourage scholars who write in widely divergent areas, yet share a focus on the changing nature of jurisdiction, to engage one another more closely. From Jackson's study of "convergence, resistance, and engagement" among courts, Kingsbury's study of "global administrative law," and Bermann's analysis of "transatlantic regulatory cooperation," to Resnik's evaluation of "trans-local networks," Weiser's account of "cooperative federalism" in telecommunications law, and Thompson's concept of "collaborative corporate governance," a related set of questions is ultimately at stake: How ought we understand the reach of any given decision-maker's jurisdiction? What are the implications of increasing overlap in such jurisdiction? And how should such overlap be "resolved"? With an eye to encouraging heightened engagement among the wide range of scholars attentive to these questions, I draw on the diverse set of papers published in a recent symposium on "The New Federalism: Plural Governance in a Decentered World" - by David Bederman, Bill Buzbee, Charles Koch, Judith Resnik, Robert Schapiro, Mark Tushnet, and Ernie Young - to explore potential elements of a modern conception of jurisdiction. I highlight four features as particularly standing out in the collected works: (1) A pervasive sense of complexity and an emphasis on jurisdictional overlap as a critical source of that complexity; (2) A perhaps resulting attention to dynamics of coordination in law and regulation; (3) Suggestion of a certain interdependence of regulatory actors; and (4) An orientation to dynamics of persuasion, rather than more hierarchical mechanisms of regulatory control. Individually, these elements represent interesting and potentially useful subjects of study. Operating in conjunction, they would seem to represent something quite new in the nature (and study) of jurisdiction, offering a framework for future research, perhaps particularly across the otherwise divided scholarly spheres noted above.
federalism, intersystemic governance, dialectic, pluralism, subsidiarity, jurisdiction, complexity, overlap, coordination, dependence, interdependence, persuasion, rhetoric, international
Abstract: Boilerplate in sovereign debt contracts issued in the United States has long dictated the unanimous consent of bondholders to any debt restructuring. This requirement persisted for decades, notwithstanding wide consensus that such unanimous action provisions increased transaction costs, produced inefficient delays in debt restructuring, enhanced the moral hazards of the sovereign debt market, and otherwise encouraged collective action failures. Yet the sovereign debt markets has recently made an about-face, replacing the unanimity requirement for debt restructuring with a less demanding provision for collective, or majority, action by creditors. Completed over the course of just a few months in 2003, this unexpected and dramatic shift offers a natural experiment of sorts: Why might contract boilerplate not respond to apparent efficiency demands for extended periods? What might cause it to respond eventually? In particular, what role might state action have in the evolution of boilerplate contract terms and in contract transition generally? In the realm of international finance, these inquiries demand urgent analysis: Can the market be expected to facilitate efficient transition in contracts with significant boilerplate elements, or is regulatory mandate essential to such change? Challenging a dichotomous choice between market and mandate, this Article proffers a third way toward efficient contract transition. While the market may not always produce efficient transition, ordinary public regulation may be no better. Instead, this Article identifies state action grounded in noncoercive regulatory cues as the mechanism of efficient transition in standardized contract terms. In the face of growing reliance on boilerplate contract terms and standard-form contracts, public intervention in the form of regulatory cues may, paradoxically, help to facilitate meaningful choice in contract design, and hence a true freedom of contract. The role of regulatory cues in sovereign debt contracts, moreover, may suggest a potential role in international regulation generally, given the limits of hard power within a community of sovereign states.
Cueing, cue, regulatory cue, game theory, coordination game, focal point, network, network externality, network effect, sovereign debt, debt restructuring, collective action, unanimous action, CAC, UAC, holdout
Abstract: “We are all socialists now,” Newsweek magazine declared some months ago. And with Republican stalwarts George Bush, Chris Cox, and Alan Greenspan respectively presiding over two of the largest expansions in federal programs since the New Deal, confessing to the failures of self-regulation, and calling for some nationalization of U.S. banks, surely the authors were on to something. More accurately – if no less dramatically – it is clear that the reign of de-regulation as the motivating framework for the design of regulatory policy, and for scholarly analysis of the regulatory state, is now behind us. Less clear, by contrast, is what should be put in its place. In what follows, I argue that an essential element in our efforts to re-conceptualize the regulatory state must be a heightened emphasis on its role in encouraging, fostering, and facilitating coordination. In a variety of increasingly important spheres of the modern social and economic order, the need for efficient coordination demands the embrace of distinct forms of regulation, in the service of distinct ends. In many areas of regulatory concern, command-and-control regulation can serve to minimize the incentives of individuals to abandon socially optimal equilibria, in the pursuit of private gain. In other critical areas, however, an analysis focused on individuals, on incentives, and on defection is inapposite. When it comes to preventing financial crises, developing the infrastructure of the internet, and articulating common standards for high-definition television – to name but a few examples – regulation designed to alter individual payoffs proves to be both unduly costly and inadequately effective. In these and other coordination settings, a regulatory paradigm oriented to group and social dynamics, to expectations and information, and to failures of coordination emerges as a kind of “new regulation.”
coordination, coordination games, Prisoner's Dilemma, game theory, market failure, network, standards, regulation, command-and-control, coercion, incentives, expectations, individualism, information, knowledge
Abstract: In the face of dramatic recent changes in the norms of sovereign debt restructuring - the substitution of collective action clauses for unanimous action requirements in bond contracts - academics and policymakers alike have raised questions about the underlying dynamics of the drafting and adoption of sovereign debt contracts. How, over less than a year, could the market of sovereign debt issues under New York law have completely abandoned the longstanding constraint of unanimous consent to restructuring, and replaced it with the far more forgiving standard of majority action? I attempt a preliminary response, grounded in the microeconomics of network effects and an analysis of "coordination games," an inadequately explored corner of game theory. Neither network effects nor coordination games has been treated in the sovereign debt literature to date, but collectively, they favor what I term a "cueing theory" of the recent transition in sovereign debt contracts. A cueing perspective, in turn, has important implications for the further development of sovereign debt practice and convention, and suggests that the conventional dichotomy of mandate versus contract in the efficient transformation of such practice and convention may overlook public entities' true role in such development.
Cueing, cue, focal point, Schelling, coordination, coordination game, network, network effects, network externalities, transition, sovereign debt, sovereign debt restructuring, sovereign debt contracts, UAC, unanimous consent, CAC, collective action clause, MAC, majority action clause
Abstract: In recent years, Rule 14a-8 of the Securities Exchange Act - first adopted more than sixty years ago to increase shareholder participation in corporate governance - has been the subject of a flurry of litigation, scholarly analysis, and SEC rulemaking. Most recently, following several years of debate, the SEC issued a significant clarification of the rule, reversing the Second Circuit's hotly contested interpretation of it in AFSCME v. AIG. For the most part, the debates surrounding Rule 14a-8 - including in the latter case - have focused on the scope of the rule's exceptions. This paper, selected for reprinting in the Securities Law Review's forthcoming volume of the year's top securities law articles, attempts to go beyond those exceptions, to suggest a fundamental rethinking of the nature and operation of the rule. Specifically, the paper explores Rule 14a-8 as an occasion for what I have termed "intersystemic governance" - an embrace of cross-jurisdictional overlap and engagement in regulatory design and function. In its very structure, thus, Rule 14a-8 calls on the SEC to interpret and apply state law. Properly utilized, this scheme offers an opportunity for the development of regulatory norms that meaningfully integrate both federal and state values of corporate governance and shareholder participation. To this end, among other reforms, I propose a shift in the SEC presumptions applicable to no-action letters, praise Delaware's recent constitutional amendment to permit SEC certification of questions to the Delaware courts, and highlight various opportunities for heightened discourse. By means such as these, a more integrated - and ultimately more efficient - regime of shareholder participation may begin to emerge.
intersystemic governance, dialectic, pluralism, Rule 14a-8, shareholder, voting, proxy, ordinary business, no-action letter, certification, state law, AFSCME
Abstract: Trapped in a metaphor articulated at the founding of modern corporate law, the study of corporate governance has - for some thirty years - been asking the wrong questions. Rather than a singular race among states, whether to the bottom or the top, the synthesis of William Cary and Ralph Winter’s famous exchange is better understood as two competitions, each serving distinct normative ends. Managerial competition advances the project that has motivated corporate law since Adolf Berle and Gardiner Means - effective regulation of the separation of ownership and control. State competition, by contrast, does not promote a race to either the top or the bottom in shareholder-managerial relations. Rather than the vertical allocation of wealth between shareholders and managers, state competition is directed to its horizontal allocation between the state and the firm as a whole. Even as state competition shifts surplus from state to firm, thus, it is agnostic as to the distribution of that surplus within the firm. Although it may generate effective rules of corporate law, it is not determinative of the substantive quality of corporate governance. Understood as such, the metrics of “efficiency” in corporate governance - and hence the core inquiries of the corporate law literature - must necessarily shift. Prevailing approaches to questions from the potential utility of federal corporate law to the long persistence of state antitakeover statutes must likewise be reconsidered.
Abstract: Trapped in a metaphor created at the founding of modern corporate law, the study of corporate governance has - for some thirty years - been asking the wrong questions. Rather than a singular race among states, whether to the bottom or the top, the synthesis of Cary and Winter's famous exchange is properly conceived as two competitions, each serving distinct normative ends. Managerial competition promotes the project that has motivated corporate law since Berle and Means - efficient regulation of the separation of ownership and control. State competition, by contrast, advances neither a race to the top nor to the bottom in shareholder-managerial relations. Instead of the vertical allocation of wealth between shareholders and managers, state competition speaks to its horizontal allocation between state and firm. Even as state competition encourages a shift of surplus from state to firm, it is entirely agnostic as to the distribution of that surplus within the firm. Understood as such, the metrics of "efficiency" in corporate governance - and hence the core inquiries of the corporate law literature - must necessarily shift. Prevailing approaches to questions from the potential utility of federal corporate law to the long persistence of state anti-takeover statutes must likewise be reconsidered.
federalism, corporate federalism, state competition, interstate competition, charter competition, managerial competition, efficient capital markets, market for corporate control, regulatory failure, managerial failure, agency costs, separation of ownership and control, Cary, Winter, race to the top
Abstract: In this brief essay, prepared as part of a symposium on The New Federalism: Plural Governance in a Decentered World, I explore the regulatory dynamics at work: (1) in the operation of Securities Exchange Act Rule 14a-8, (2) in the interventions of then-Attorney General Eliot Spitzer in the national securities markets, and (3) in recent steps by the Securities and Exchange Commission to reconcile U.S. and international accounting standards. In each case, a distinct dynamic of regulatory interaction - what I term intersystemic governance - can be observed. In such cases, overlapping jurisdiction combines with various sources of interdependence to produce a regulatory scheme that goes beyond regulatory cooperation supporting each jurisdiction's pursuit of its own goals. Rather, it may produce something akin to joint, or intertwined, regulation of relevant individuals, institutions, or subject-matter. In such regimes, discrete sets of regulatory rules may collapse into a collective whole.
intersystemic governance, dialectic, pluralism, Rule 14a-8, shareholder proposals, proxy, no-action letter, Spitzer, accounting standards, GAAP, IAS, SEC
Abstract: In a recent essay in the Yale Law Journal, constitutional law scholar Michael Stokes Paulsen argues that “[t]he force of international law, as a body of law, upon the United States is . . . largely an illusion.” Rather than law, he suggests, international law is mere “policy and politics.” For all the certainty with which this argument is advanced, it cannot survive close scrutiny. At its foundation, Professor Paulsen’s essay rests on a pair of fundamental misconceptions of the nature of law. Law is not reduced to mere policy, to begin, simply because it can be undone. Were that true, little if anything would be law. The sources of law, meanwhile, are not singular, but plural. Even were international law not domestic law, it would still be law. These errors, in the final analysis, are fairly basic. Before discussing them, consequently, this Yale Law Journal Online response considers how Professor Paulsen ends up going so completely astray. Here, his essay's invocation of Clausewitz’s “fog” of war - with its attendant distortions and misperceptions - is perhaps telling. A species of just this may be at work here, with Professor Paulsen misled not by the fog of war, but by an exaggerated sense of certainty in both the premises with which he begins, and the conclusions he seeks to advance.
international law, constitutional law, customary international law, positivism, Austin, Fog of War
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