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Abstract: Federal securities law and enforcement via securities fraud class actions today has become the most visible presence in regulating corporate governance. State law, long at center stage in discussions of corporate governance, continues to provide the legal skeleton for the corporate form and state fiduciary duty litigation continues as a frequent means to monitor managers. Yet, in today's world, state law does so almost entirely in the specific contexts of decisions about acquisitions or in self-dealing transactions. The empirical evidence in this Article illustrates that corporate governance outside of these areas has passed to federal law and in particular to shareholder litigation under Rule 10b-5. The Sarbanes-Oxley Act of 2002, passed by Congress in the wake of the current corporate accountability scandals, provides new evidence of the expanded role of federal law. But, the move to federal corporate governance is broader than that law and has a longer history than the current scandals. The ascendancy of federal law in corporate governance reflects at least three factors. First, disclosure has become the most important method to regulate corporate managers and disclosure has been predominantly a federal, not a state, methodology. Second, state law has focused largely on the duties and liabilities of directors, and not officers, and federal law has increasingly occupied the space defining the duties and liabilities of officers. Officers have become the fulcrum of governance in today's corporations. Third, federal shareholder litigation based on securities fraud has several practical advantages over state shareholder litigation based on fiduciary duty that have contributed to the greater use of the federal forum. As a result of these trends, federal law now occupies the largest part of the legal corporate governance infrastructure in the 21st century. The outpouring of suggested reforms that have followed in the wake of Enron and WorldCom have focused on federal law and on the conduct of officers and directors, rather than state law, which in practice, focuses mainly on directors. Indeed, the discussions about reforms have excluded state law almost entirely. In this article, we develop the idea of federal law as corporate governance in three parts organized around history, empirical data, and analysis. In Part I, we begin with the traditional legal template. State corporate law is the focus and federal securities law plays a supporting role. In Part II, we present empirical data on the use of both federal and state litigation to regulate corporate governance. We begin with a data set we have developed of securities fraud class action complaints filed in 1999. Our analysis of those complaints shows that securities fraud class action litigation is being used mostly in areas that relate to the managers' operation of the business. Not surprisingly, for example, many of the complaints raise concerns about the ways in which managers have recognized revenues or engaged in some form of accounting manipulation. From that base, we expand the story using data developed by others on securities fraud class actions more generally. Then, we compare transactions that give rise to securities fraud claims to another data set that covers all corporate cases filed in the Delaware Chancery Court for that same year. The result is a surprisingly narrow focus for state litigation and a much broader one for federal suits, revealing a gap in the standard learning about corporate governance. In Part III, we address how the federal securities fraud picture we provide might fit with state shareholder litigation in a current theory of corporate governance.
corporate governance, disclosure, securities fraud, federalism
Abstract: In the aftermath of Enron and other corporate failures in the post-bubble economy, the menu of possible regulatory responses included federal regulation, state corporate law, or governance by self-regulatory organizations such as the stock exchanges. This commentary sets out the response of each actor in the first year after Enron and examines why state law chose to stand pat during this period. Part II examines a related problem posed by Enron - did it push the envelope in the use of separate entities as much as it appeared to do in accounting treatment? It compares Enron's use of SPEs to more familiar uses of separate entities in piercing the corporate veil contexts and concludes that the traditional corporate remedies of piercing, bankruptcy, or personal liability are likely to be less effective than disclosure is addressing future abuses of the type that arose in Enron.
Corporate Governance, Special Purpose Entities, Enron, Sarbanes-Oxley, Corporate Entity
Abstract: Corporate law expresses a profound ambiguity toward the role of shareholders. Courts announce that shareholders are "critical to the theory that legitimates the exercise of power - by directors and officers over vast aggregations of property that they do not own." At the same time shareholders have a very difficult time actually making any corporate decisions. In this Article, we strive to define a new role for shareholders by drawing on economic theories of the firm and the structure of corporate law. More particularly we examine the role of shareholders in hostile corporate takeovers, the area where the interests of shareholders and directors collide most dramatically, and highlight a necessary "sacred space" for shareholder self-help, free of director or judicial intrusion.
Abstract: Shareholder lawsuits are a principal legal means to control management agency costs in corporations, yet they generate their own agency costs from the attorneys who bring representative litigation. The key policy question, and one that is central to good corporate governance, has long been how to properly balance the positive management agency reductions from shareholder litigation against the often-maligned litigation agency costs. We address the tradeoff inherent in this debate using our empirical study of shareholder litigation in Delaware. Our data set of all 1000 corporate fiduciary duty cases filed in Delaware in 1999 and 2000 is the largest empirical study of shareholder litigation. We find that more than 80% of these cases are class actions against public companies challenging one type of director decision - whether or not to participate in a corporate acquisition. By contrast, derivative suits, the traditional shareholder litigation that is the staple of corporate law casebooks, make up only about 14% of all fiduciary duty suits. The acquisition-oriented class actions are a new, previously unstudied category of representative litigation, an area long dominated by studies of state derivative suits and federal securities fraud class actions. We find these suits do provide some management agency costs reductions, but these are concentrated in only one subset of the suits that are brought. Settlements leading to relief in an acquisition setting are not spread across all acquisitions complaints (including hostile, second bidder acquisitions etc.), but rather concentrated where there is a majority shareholder who is attempting to cash-out the minority interest held by public shareholders on terms that have been picked by the majority. On the opposite side of the equation - whether these suits possess high litigation agency costs - we find conflicting evidence. The acquisition oriented class action suits have many characteristics that have been identified in other contexts as indicators of agency costs (e.g., suits filed quickly, many suits per transaction). Yet, these litigation agency costs are below the level of perceived costs that spurred securities fraud legislation, for example. We suggest that Delaware could reduce the litigation agency costs associated with class actions without increasing management agency costs by instituting two procedural reforms. First, Delaware should enact a lead plaintiff provision, similar to that adopted for federal securities fraud class actions in PSLRA, to encourage larger investors to become more active monitors of fiduciary duty litigation. Second, we suggest that Delaware should put in limitations on professional plaintiffs as in PSLRA in order to reduce litigation agency costs further. Our article also examines derivative lawsuits from the two-year period, but we find that they do not look much like our acquisition cases (e.g., longer time to file and to settle, fewer suits per transaction and more motions). Derivative cases in our database are concentrated in areas where management agency costs seem likely to be high and produce a number of beneficial settlements that are concentrated in duty of loyalty contexts. Given these characteristics and the current balance between reducing management agency costs and increasing litigation agency costs in derivative litigation, we suggest that Delaware could loosen some of the restrictions that it has placed on shareholder plaintiffs in derivative cases.
Abstract: Shareholder litigation is the most frequently maligned legal check on managerial misconduct within corporations. Derivative lawsuits and federal securities class actions are portrayed as slackers in debates over how best to control the managerial agency costs created by the separation of ownership and control in the modern corporation. In each instance, early hopes these suits would effectively monitor managerial misconduct have been replaced with concerns about the size of the litigation agency costs of such representative litigation, which can arise when a self-selected plaintiff's attorney and her client that are appointed to pursue the claims of an entire class of shareholders have interests that may differ from those of the class. Now, however, a new form of shareholder litigation has emerged that is distinct from derivative or securities fraud claims: class action lawsuits filed under state law challenging director conduct in mergers and acquisitions. The empirical data reported in this article show that these acquisition-oriented suits are now the dominant form of corporate litigation, outnumbering derivative suits by a wide margin. Are these acquisition-oriented class actions just another deadbeat in the corporate governance debate? Should policymakers take action to cut back on the development of this new form of shareholder litigation? In this paper, we argue that, just as with derivative suits and securities fraud class actions, good policy must balance the positive management agency cost reducing effects of these acquisition-oriented shareholder suits against their litigation agency costs. This new breed of suits has positive management agency cost reducing effects that may offset the litigation agency costs that accompany them. Our data set of all 1000 corporate fiduciary duty cases filed in Delaware in 1999 and 2000 is the largest empirical study of shareholder litigation. We find that more than 80% of these cases are class actions against public companies challenging one type of director decision - whether or not to participate in a corporate acquisition. By contrast, derivative suits, the traditional shareholder litigation that is the staple of corporate law casebooks, make up only about 14% of all fiduciary duty suits. The acquisition-oriented class actions are a new, previously unstudied category of representative litigation, an area long dominated by studies of state derivative suits and federal securities fraud class actions. We find these suits do provide some management agency costs reductions, but these are concentrated in only one subset of the suits that are brought. Settlements leading to relief in an acquisition setting are not spread across all acquisitions complaints (including hostile, second bidder acquisitions, etc.), but rather concentrated where there is a majority shareholder who is attempting to cash-out the minority interest held by public shareholders on terms that have been picked by the majority. On the opposite side of the equation - whether these suits possess high litigation agency costs - we find conflicting evidence. The acquisition-oriented class action suits have many characteristics that have been identified in other contexts as indicators of agency costs (e.g., suits filed quickly, many suits per transaction). Yet, these litigation agency costs are below the level of perceived costs that spurred securities fraud legislation. Placing our findings in the historical context of the debate over the value of representative shareholder litigation, we believe that the positive management agency cost reducing effects of acquisition-oriented class actions are substantial, while the litigation agency costs they create do not appear excessive. For these suits, we therefore disagree with earlier studies that have claimed that all representative shareholder litigation has little, if any, effect in reducing management agency costs and should be evaluated solely in terms of its litigation agency costs.
Abstract: Derivative suits, long the principal vehicle for discussions about representative litigation in corporate and securities law, now share the stage with younger cousins - securities fraud class actions and state law fiduciary duty class actions. At the same time alternative governance vehicles - independent directors, auditors and other reforms that have followed in the wake of Enron - potentially diminish the relative place of litigation such as derivative suits. This article presents data from all derivative suits filed in Delaware over a two-year period. We find a relatively small number, certainly as compared to fiduciary class action and securities fraud class actions. Unlike these other representative suits, derivative suits are used for both public and close corporations. They arise usually in a duty of loyalty context. Contrary to earlier studies, we do not find evidence that these cases are strike suits yielding little benefit. Instead, roughly 30% of the derivative suits provide relief to the corporation or the shareholders, while the others are usually dismissed quickly with little apparent litigation activity. In cases producing a recovery to shareholders, those amounts typically exceed the amount of attorneys' fees awarded by a significant margin. They do demonstrate some indicia of litigation agency costs (for example suits being filed quickly, multiple suits per controversy, and repeat plaintiffs' law firms), but each of these is much less pronounced for derivative suits than for other forms of representative litigations. Overall, the claim that derivative suits are strike suits is much weaker than in earlier periods. The Delaware judiciary, which hears most public company corporate litigation in America, has effectively monitored these cases. There is room to open the door for larger shareholders to utilize these suits to police corporate misconduct. Institutional shareholders, while not willing to take on as large a role in governance as many have suggested in terms of naming directors and the like, may be willing to take a larger role in derivative litigation. Thus we see potential for derivative litigation to play a more important role in the future. We therefore suggest that suits brought by a one percent or larger shareholder should be excused from the demand requirement currently applied in derivative suits.
Private law, compliance law, corporate & securities law, finance & corporate governance
Abstract: The traditional view of corporate law as arising from state law, with federal law in a supporting role no longer describes the post Sarbanes-Oxley world. This paper presents modern corporate governance as a collaborative process between the federal government (mostly acting through the SEC), state law (mostly acting through the Delaware courts, but also including its legislature and those in other states) and the self-regulatory organizations such as the stock exchanges. The focus is on the third source, particularly the listing requirements of the New York Stock Exchange. The Reforms announced in 2002 portend a dramatic increase in the role of the listing requirement in defining American corporate governance. The interaction between the NYSE and state and federal law is heavily tilted toward its overlap with federal law. The pattern of NYSE regulation of the last decade is that the SEC chair makes a speech or a telephone call identifying a problem, the Exchange convenes a committee of experts and proposes a solution that is sent to the SEC and the various interested parties engage the Exchange and the SEC in discussions about what the law should be. Prominent examples include requirements for independent directors, shareholder approval of stock options, audit committee procedures and one share/one vote rules. This is a different process than what occurs in state law or in direct SEC regulation and it is becoming a larger part of American corporate governance.
corporate governance, stock exchanges, listing requirements, federalism
Abstract: Congress enacted the Private Securities Litigation Reform Act of 1995 (PSLRA or the Act) to address problems plaguing securities class action litigation. This Article surveys the empirical evidence on the impact of the PSLRA, examining the specific categories of reforms introduced by the Act. We look at the existing evidence relating to: substantive changes in the definition of fraud necessary to bring a securities class action; the Congressional efforts to empower lead plaintiffs relative to the plaintiffs' attorney bar; and the direct sanctioning of lawyers authorized in the Act. Given the PSLRA's focus on changing the incentives and behavior of plaintiff lawyers, we also provide preliminary data on the role of the lead plaintiff law firm. We report that while the market concentration of plaintiff law firms based on settlement amounts did not change appreciably after the enactment of the PSLRA, the tendency of top tier law firms to associate with lower tier firms did increase significantly in the post-PSLRA period. We also report that institutional investors taking on the role of lead plaintiffs in the post-PSLRA period tended to develop repeat relationships with select top tier law firms. Our survey of the existing evidence and study of new evidence relating to the role of plaintiff law firms leads us to raise several questions for possible new lines of research into the effectiveness of the PSLRA.
lawyers, plaintiffs attorneys, securities class actions, litigation, private securities litigation reform act
Abstract: Recent scholarship on corporate governance, cutting across law, finance, government and economics, has centered around whether or not corporate law is converging into one dominant model within a competitive global capital market. Much of current academic scholarship (with strong dissents) suggests a convergence in this competition toward the dispersed ownership model with its reliance on strong securities markets, extensive disclosure and the use of the market for corporate control to discipline management. Often this is linked to the recognition of shareholder primacy in corporate governance. Against the backdrop of such global discussions, this article focuses on the role for takeover regulation in a dispersed ownership system, a reach designed to broad enough to encompass the American and Australian legal systems as well as the United Kingdom. Takeover regulation necessarily weaves two relationships - first, the interaction the bidder company and the shareholders of the target and second, a separate but necessarily overlapping relationship between the shareholders of the target and their own management. Poison pills, for example, impact both relationships - they prevent a bidder from coercing target shareholders at the same time that they empower managers to prefer their view of the corporation over that of the shareholders. The focus here is on the second relationship and the different methods visible in national legal systems to address this problem. The American system, illustrated by Delaware's law, relies on courts and judicial enforcement of fiduciary duty to decide when managers have overstepped their bounds in imposing defensive tactics. Other dispersed ownership jurisdictions rely on self-regulatory organizations or governmental bodies to limit director defensive tactics in a way that necessarily empowers collective shareholder action.
takeovers, Australia, U.S., corporate governance
Abstract: Public international law requires that states and governments inherit ("succeed to") the debts incurred by their predecessors, however ill-advised those borrowings may have been. There are situations in which applying this rule of law strictly can lead to a morally reprehensible result. Example: forcing future generations of citizens to repay money borrowed in the state's name by, and then stolen by, a former dictator. Among the purported exceptions to the general rule of state succession are what have been labeled "odious debts", defined in the early twentieth century as debts incurred by a despotic regime that do not benefit the people bound to repay the loans. The absconding dictator is the classic example. The removal of Iraq's Saddam Hussein in 2003 sparked a resurgence of interest in this subject. By enshrining a doctrine of odious debts as a recognized exception to the rule of state succession, some modern commentators have argued, a successor government would be able legally to repudiate the loans incurred by a malodorous prior regime. This, they contend, would have two benefits: it would avoid the morally repugnant consequence of forcing an innocent population to repay debts incurred in their name but not for their benefit, and it would simultaneously force prospective lenders to an odious regime to rethink the wisdom of advancing funds on so fragile a legal foundation. The authors argue that in this recent debate the adjective "odious" has quietly migrated away from its traditional place as modifying the word "debts" (as in "odious debts"), so that it now modifies the word "regime" (as in "debts of an odious regime"). This is a major shift. If this new version of the odious debt doctrine is to be workable, someone must assume the task of painting a scarlet letter "O" on a great many regimes around the world. Who will make this assessment of odiousness and on what criteria? The stakes are high. An unworkable or vague doctrine could significantly reduce cross-border capital flows to sovereign borrowers generally. The authors are skeptical that this definitional challenge can be met. Rather than jettison the whole initiative as quixotic, however, the authors investigate how far principles of private (domestic) law could be used to shield a successor government from the legal enforcement of a debt incurred by a prior regime under irregular circumstances. A wholesale repudiation of all contracts signed by an infamous predecessor may be more emotionally and politically satisfying for a successor government, but establishing defenses to the legal enforcement of certain of those claims based on well-recognized principles of domestic law may be the more prudent path. The authors believe that such defenses exist under U.S. law (and presumably elsewhere) and could be used to address many, although admittedly not all, cases of allegedly odious debts.
Abstract: Discussion of shareholder voting frequently begins against a background of the democratic expectations and justifications present in decision-making in the public sphere. Directors are assumed to be agents of the shareholders in much the same way that public officers are representatives of citizens. Recent debates about majority voting and shareholder nomination of directors illustrate this pattern. Yet the corporate process differs in significant ways, partly because the market for shares permits a form of intensity voting and lets markets mediate the outcome in a way that would be foreign to the public setting and partly because the shareholders' role is more limited than that of citizens in the political process. The most developed theory of corporate voting, Easterbrook & Fischel's economic based theory from the 1980s, describes shareholder voting as the best means to fill gaps in incomplete contracts; shareholders as the residual owners have the best economic incentives to exercise such discretion. Such a theory supports unfettered shareholder action substantially broader than what actually exists. In this article, we set out a new theory for shareholder voting based on information theory and more particularly voting as a method of error-correction. Like the prior theory, our approach explains why, among various corporate constituencies, only shareholders may vote. More importantly, our theory provides a more consistent theoretical foundation for explaining the few issues on which shareholders actually do vote. We use this approach to address the recent development of empty voting, a process where investors have used innovations in finance such as derivatives, equity swaps and share lending, to obtain voting rights in a corporation stripped of any financial interest in the company. The error-correction purpose of corporate voting requires that there be alignment between the voting right and the underlying financial interest of shares as has been illustrated in the traditional corporate law practices of one share/one vote and bans on vote buying and contracts that separate voting rights and financial interests. We propose that courts reinvigorate these principles to police empty voting. Our theory also provides a superior framework in which to assess proposals for increased shareholder power in corporate governance.
shareholder voting, empty voting, corporate democracy, director primacy, Blasius, theories of corporate voting
Abstract: Benjamin Cardozo's 1928 opinion in Meinhard v. Salmon that co-venturers owe each other "the punctilio of an honor the most sensitive" remains, 80 years later, a defining point for framing the discussion of fiduciary duty, still the most important issue in the law of business associations. This work develops the story of Messers. Meinhard and Salmon and their relationship with the very wealthy Livingston/Gerry family who owned the land in New York City at Fifth Avenue and 42nd Street that gave rise to this long-running dispute. The context helps delineate the scope of fiduciary duty in a way that Cardozo's memorable language does not. This in turn leads to a discussion of the role of private ordering in structuring relationships where such a duty may not be desired and what this classic case may tell us about contracting out of fiduciary duty in a modern setting.
fiduciary duty, Cardozo, director's duty, contracting out
Abstract: The law's recognition of a corporation as an entity separate from its shareholders permits corporate planners to partition assets in a way that often contributes to economic efficiency. That first-mover advantage, however, is not unlimited and the law regularly limits the abuse of such planning, as in non-consensual settings where the entity named as the actor lacks sufficient assets to pay harms arising out of the business. Agency law has been a traditional means by which liability has been extended beyond the corporate entity in particular circumstances. This paper explores how this traditional use of agency law has dissipated and the growing use of agency law to reinforce separateness and asset partitioning, even in non-consensual settings. The central point of discussion is the Supreme Court's decision in U.S. v. Bestfoods, an environmental case in which the Court contained liability within a corporate subsidiary. The article suggests this use goes beyond traditional agency principles, such that a deeper analysis of this context would be warranted.
agency, asset partitioning, corporation, piercing the veil
Abstract: The defining issue of corporate law is the intensity of judicial review of director actions. Over the last four decades, Delaware has developed an elaborate array of judicial standards and defined (and then rearranged) the process by which such litigation plays out. This piece explores that development using the framework set out in Sinclair Oil v. Levien, a classic of Delaware corporate jurisprudence. The first part tells the story of this case, the parties and their lawyers, in a way that seeks to provide a context for the discussion of fiduciary duty within a parent/subsidiary corporate group. Subsequent parts develop, with a graphic aid, the judicial space defined by the Sinclair court and filled in by judges over the ensuing decades and then analyzes the fiduciary duty of controlling shareholders Sinclair provides room for "selfish" ownership for a majority shareholder, so long as the minority shareholders receive a proportional benefit, a standard that at the time seemed to expand the discretion for majority shareholders. Viewed from a point decades later, this part of Sinclair has not proved to be a template for broader applications and other doctrines have developed to constrain the actions of majority shareholders. The intensity of judicial review of corporate decisions is the central issue of corporate law. Sinclair Oil Corp. v. Levien, a foundational decision in Delaware corporate jurisprudence from 1971, defines the space within which judicial review occurs with a format that still guides courts today. Along one boundary is deference by judges to decisions of business managers that is reflected in the business judgment rule. Along the other boundary is an intrusive judicial involvement by which the court asks the corporation or other defendant to prove the intrinsic fairness of the transaction. Since Sinclair the Delaware courts have filled in the space defined within those boundaries with a host of other decision points and varying degrees of judicial review, but it was Sinclair that provided the landscape. The case remains in wide use today in classrooms (and courtrooms) because it presents an attractive pedagogical package. Three challenged actions were before the court; for two of those actions the court adopted deference and for the other, intrinsic fairness. Hence, the outcome provides a structure that directs students to address the differences between the two standards. At the same time, the case raises the difficult policy question of how far a parent corporation can go in directing the actions of the subsidiary for the parent's own purposes. The Sinclair court takes a rather narrow definition of self-dealing, requiring that the parent get something at the expense of the subsidiary before a court will interfere with the directors' decision. This story unfolds in three parts. Section I introduces the parties and frames the issues presented in the case. Section II develops, with a graphic aid, the judicial space defined by the Sinclair court and filled in by judges over the ensuing decades. Section III analyzes the fiduciary duty of controlling shareholders (as opposed to duties of directors and managers without share control.) Sinclair provides room for "selfish" ownership for a majority shareholder, so long as the minority shareholders receive a proportional benefit, a standard that at the time seemed to expand the discretion for majority shareholders. Viewed from a point decades later, this part of Sinclair has not proved to be a template for broader applications and other doctrines have developed to constrain the actions of majority shareholders.
director action, judicial review of corporate action, business judgment rule, intrinsic fairness, enhanced scrutiny, controlling shareholders, fiduciary duty
Abstract: Taming the power of Wall Street was a principal campaign theme for Franklin Delano Roosevelt in the 1932 election. Roosevelt's election bore fruit in the Securities Act of 1933, which regulated the public offering of securities, the Securities Exchange Act of 1934, which regulated stock markets and the securities traded in those markets, and the Public Utility Holding Company Act of 1935 (PUHCA), which legislated a wholesale reorganization of the utility industry. The reform effort was spearheaded by the newly created Securities and Exchange Commission, part of the new wave of experts brought to Washington to rein in business. PUHCA also marked the federal government's first significant incursion into corporate governance, with a corresponding reduction in the traditional role of investment bankers. The SEC's ascendance over the investment bankers was reinforced during FDR's second term by the Chandler Act of 1938, which provided the agency with a broad role in the bankruptcy reorganization of troubled companies.
Enacting those statutes was only the beginning, as the scope and effectiveness of the SEC's regulatory efforts depended critically on navigating these new statutes past an initially hostile Supreme Court. After substantial delay in the lower courts, the securities statutes eventually got a friendly hearing in the Supreme Court, where a number of Justices came to the Court after serving as the "Founding Fathers" of the federal securities laws. Roosevelt's Supreme Court nominees were involved in drafting the new legislation, securing its passage in Congress and implementing a litigation strategy that successfully stalled final determination of the constitutionality of the securities laws until New Deal appointed justices were in place. Felix Frankfurter played an important role in shaping the Securities Act and PUHCA, and was a key advisor on litigation strategy to the Roosevelt administration. Hugo Black led the legislative battle to enact PUHCA against the utility companies. Stanley Reed and Robert Jackson were key courtroom advocates arguing PUHCA's constitutionality. William O. Douglas headed the study of Protective Committees that led to the Chandler Act and was Chairman of the SEC.
In this article, we explore the role of the New Deal justices in enacting the securities laws, litigating the challenges brought against them and then interpreting these laws in securities cases before the Supreme Court. We show the important role that these New Deal justices played in ensuring a broad scope for the federal securities laws through generous interpretation. Once constitutional questions had faded, securities cases proved to be a critical testing ground for newly emerging theories of administrative law. We demonstrate the split over the importance of judicial review versus deference to the rule of experts that emerged among these Roosevelt appointees. Finally, we explore the relative lack of influence of Douglas and Frankfurter in these cases, despite their familiarity and experience with the securities laws.
Supreme Court, Securities Act, New Deal justices, bankruptcy reorganization
Abstract: Delaware's century-long success in attracting corporations to use its law has provoked a recurring series of inquiries seeking to explain how one of our smallest and least populous states dominates such an important part of our national economy. The larger potential challenge to Delaware's hegemony is the continued shrinking of the space for any state corporate law as the federal government elects to encompass more and more of all fields of American law. This article develops how judicial requirements as to disclosure have become a way for Delaware to push into the part of corporate governance that has been most visibly the federal government's domain. By case law particularly visible since 2007, Delaware courts have expanded the reach of Delaware law in corporate governance via disclosure even in an age of growing federal regulation. This development shows that disclosure to protect the exercise of shareholder governance rights cannot be effectively separated from legal protection that substantively protects shareholder's ability to act within that space, protection usually provided by fiduciary duty provided by Unocal, Revlon and other such well known Delaware cases. Absent a broader federalization of corporate law, only Delaware can provide protection of both disclosure and the shareholders' substantive rights, giving Delaware a continuing advantage as a lawgiver in resolving corporate governance disputes. Additionally, this article addresses challenges made to Delaware law as indeterminate, providing a structural overview that suggests judicial review of director action can best be seen within a space running between judicial deference on one side and intrusive judicial review on the other. The article provides a schematic presentation of how various Delaware cases seen as indeterminate easily fit within such a structure.
disclosure, shareholder voting, shareholder access, going private, Revlon duties, state law remedies
Abstract: This article looks at the Supreme Court's output in two areas of private law, securities and antitrust. The data reveals remarkably similar patterns in the two focus areas. An expansive period of cases favoring plaintiffs' rights through 1972 abruptly gave way to a stark pro-defendant period after Justices Powell and Rehnquist joined the Court on the same day. Yet the pattern did not continue through the entire twenty-five year period during which Republican presidents made ten consecutive appointments to the Court. Instead, since the mid 1980s, the Court's decisions in each area have been about evenly split and the number of cases has dropped dramatically. After presenting the empirical findings, the article explores what theories might explain both of the shifts. An attitudinal model focused on the preferences of individual justices could explain the first shift, but a richer theory is necessary for the entire period. An alternative explanation focuses on an entrepreneurial justice, in these two areas it was Lewis Powell. The article also presents regressions analysis and a discussion of the differing economic schools of Justices Powell and Rehnquist that help explain the results.
Securities, Antitrust, Supreme Court
Abstract: Abstract already posted separately.
equity markets, law and finance
Abstract: This paper studies three scandals that embroiled U.S. financial markets during the past decade, including the Nasdaq market-makers' use only of odd-eighths quotes, the abuse of specialist power on the New York Stock Exchange, and the mutual fund scandal. We attempt to attribute the resolution of these situations to the curative effects of markets versus regulation. We argue that the intervention of the legal system through regulation and/or litigation is often necessary to help resolve the misalignment of incentives needed for markets to accomplish their goal of maximizing value. The paper suggests that there exists an important synergy between financial markets and law that is often overlooked.
Abstract: Delaware faces an unprecedented challenge to its role as the dominant law-giver as to corporate law. Its reign is not imperiled by the other states racing with Delaware but by the federal government and the stock exchanges. These alternative law-givers have long accorded state law a broad berth to define the relative rights of shareholders, directors, and officers within a corporation. In the aftermath of the Enron scandals, Delaware adopted more of a status quo response while the other two law-givers added additional obligations that intrude into the space long occupied by Delaware. This article identifies the core parts of what might be called Delaware's mission statement as to corporate law: trust directors, let them decide how they want to use the various gatekeepers, contracts, and market constraints (including not using them if they see fit) with occasional judicial check via fiduciary duty cases. The post-Enron federal and stock exchange rules seek to narrow the discretion that directors have to act by, for example, imposing new obligations directly on officers and regulating duty of care type concerns that traditionally have been the province of state law. The article concludes with suggestions of how Delaware might adapt its law given its mission statement and the current realities of the other law-givers to shore up its dominant position in making corporate law.
Delaware, Journal, Corporate, Law, stock exchange, federal government
Abstract: Societal control over corporations in part depends on the answer to the question of whether there are sufficient incentives or controls on corporations to insure their interests parallel those of society, or in a paraphrase of a famous statement of a half-century ago, is what is good for General Motors good for the country? This paper addresses the traditional way that governments have sought to constrain corporate behavior, how that interaction shifts when corporate subsidiaries are involved, and finally how outsourcing can again readjust that dynamic yet again. Where there are three possible methods to externalize - the use of the corporation itself, a subsidiary as a separate and distinct liability-capturing device, and the ability to move assets outside the country of regulation - soft law becomes a larger player in defining a societal response.
outsourcing, corporate subsidiaries, good for General Motors, societal control corporations, soft law
Abstract: How should Delaware position its corporations statute to maintain the First State's preeminence in corporate law, which it has enjoyed throughout the four decades since the last comprehensive revision of the statute? This article suggests Delaware is vulnerable in a way that was not particularly visible in 1967, not from any of the other forty-nine states, but from the federal government. Delaware has made it too easy for the federal government, through something resembling a stealth preemption, to occupy more of corporate governance. The federal move has occurred in areas of shareholder and officer roles, which are relatively underdeveloped in the Delaware statute. Federal law has been the realm within which most of the debate has occurred regarding issues like shareholder power to initiate agenda items for a stockholder's meeting, shareholder nominations for the board of directors, and shareholder proposed bylaws. Filling the shareholder space will require a more complete specification of the shareholder role than that which has occurred until now, but should remain consistent with Delaware's traditional approach to corporate law and its trust of directors. Shareholder voting can best be seen, not by analogy to citizens in our civil polity, but as performing an error-correction function when directors are conflicted or otherwise disabled in acting for the corporation.
Delaware, Journal, Corporate, Law, corporate governance, federal, agenda items, stockholder meeting
Abstract: Independent agencies have long been viewed as different from executive-branch agencies because the President lacks authority to fire their leaders for political reasons, such as failure to follow administration policy. In this Article, we identify mechanisms that make independent agencies increasingly responsive to presidential preferences. We find these mechanisms in a context where independent agencies traditionally have dominated: financial policy. In legislative proposals for securing market stability, we point to statutorily mandated collaboration on policy between the Federal Reserve Board and the Secretary of the Treasury. In administration practices for improving securities regulation, we focus on White House coordination of, and Treasury Department involvement in, the policy of the Securities and Exchange Commission. We argue that these mechanisms undermine the conventional distinction between independent agencies and executive-branch agencies. Additionally, we argue that these mechanisms, though producing presidential involvement short of plenary control, are consistent with the strategic political interests of the President. We further contend that they promote political accountability, particularly because greater presidential control is unnecessary to align agency preferences with presidential preferences and instead might be counterproductive. In making this argument, we present a nuanced vision of accountability and update the standard justifications for independence. We also consider the constitutional implications of the new independence-accountability hybrids that we see, as well as possible applications in areas where executive-branch agencies traditionally have dominated. Our claim is not that these hybrids are part of law in any of these contexts; rather, we seek to highlight institutional relationships that outstrip conventional categories but fit with the development of the administrative state. In the future, agency independence will occur not at odds with political accountability but engaged with it along a spectrum of institutional structures.
agency, executive branch, President, presidential control, accountability, expertise, independence, financial reform, positive political theory, political science, health care, climate change, OIRA, SEC, Fed, PCAOB, Treasury, securities, market stability, monetary policy, interest rates
Abstract: This article examines the three central challenges to insider trading set forth in Henry Manne's 1967 book: 1) that there is no coherent theory explaining insider trading; 2) that there is no significant injury to corporate investors from insider trading; 3) that insider trading constitutes the most appropriate device for compensating executives. As to the first, the article states that federal regulation has passed through three distinct movements that do not necessarily connect to one another. The current focus on agency concepts and the broader principles used by the Supreme Court in O'Hagan probably have no more staying power than the theories that defined previous movements. Investor harm has been difficult to show. A coherent theory about harm may turn on principles from behavioral economics and cognitive psychology. Executive compensation, the most controversial of Manne's original assertions, is an even weaker argument today because of the broadening array of alternative forms of executive compensation and their relative advantage in balancing incentives for executives and policing management behavior.
Abstract: The long running debate over the relative roles of federal and state law in regulating corporations, which in recent years has tilted toward state regulation even while the debate has remained relatively quiet, may have taken a new turn. This article suggests that in one segment of corporate law, the role of shareholders, a distinct federal trend is visible. The article discusses: 1) federal preemption in the Uniform Standards Act of 1998, 2) federal law which has expanded the place of shareholder voting, and 3) state disclosure law deferring to federal disclosure rules. The discussion occurs within the author's suggested structure for approaching corporate law based on the three types of rights for shareholders: they vote, sell or sue, all in limited doses. The article concludes with an examination of whether there is a hierarchy among these three functions as to what law can do as compared to markets or private ordering, and what federal and state lawmakers have chosen to have law do.
Abstract: With the return of a hot takeover market amidst a shareholder population in which institutional shareholders have a dominant role there has been renewed discussion of the role of shareholders in corporate decision-making and for takeovers in particular. This article takes the author's suggested structure as to what shareholders do (they vote, sell or sue, all in limited doses) and examines the contrasting lines of Delaware law as to permissible limits on director action to limit shareholder selling (see Unocal & Unitrin) and permissible limits on director actions to limit shareholder voting (see Blasius). The article examines reasons that might explain a difference in the two contexts and argues for a unified approach that would preserve space for shareholder decision-making.
Abstract: Piercing the corporate veil is the most litigated issue in corporate law. The rise of business forms such as the limited liability company (LLC) and limited liability partnership (LLP) raises a new question: how will the piercing concept translate to these new entities? Professor Thompson begins his look at that question by providing a quick overview of corporate limited liability rules. He then examines the insulating language of new LLC statutes nationwide -- first categorizing the statutes according to their potential for expansive insulation, then interpreting the extent that these statutes change common law rules on limited liability. Next, Professor Thompson undertakes a similar examination of LLP statutes. He concludes that liability protection under these new LLC and LLP statutes will not vary significantly from state to state and will not be markedly different from the protection provided by the corporate form. He also suggests that these new entities will focus discussion on currently underdeveloped parts of piercing law.
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