50 Pages Posted: 29 Mar 2017 Last revised: 21 Jul 2017
Date Written: March 27, 2017
This Article explores the misalignment between the disclosure requirements of the federal securities laws, and the private causes of action available to investors to enforce those requirements.
Historically, federally-mandated disclosures were designed to allow investors to set an appropriate price for publicly-traded securities. Today’s disclosures, however, also enable stockholders to participate in corporate governance and act as a check on managerial misbehavior. To enforce these requirements, investors’ chief option is a claim under the general anti-fraud statute, Section 10(b) of the Securities Exchange Act of 1934. But courts are deeply suspicious of investors’ attempts to use that statute to hold corporations liable for false statements related to governance.
As this Article demonstrates, judicial skepticism can be traced to the functional elimination of the element of reliance from private investors’ claims. Without the element of reliance, courts cannot discriminate between deception, which Section 10(b) prohibits, and poor managerial decision-making, to which Section 10(b) does not speak. Doctrines that courts developed to distinguish between the two now have the perverse effect of devaluing disclosures intended to facilitate shareholder participation in corporate governance. More troublingly, they enforce a normative viewpoint that shareholders do not, or should not, have interests beyond the short-term maximization of a firm’s stock price. This interpretation of shareholder preferences undermines modern regulatory initiatives that employ shareholders as a restraining force on antisocial corporate conduct.
I propose that courts adopt new interpretations of Section 10(b) that reestablish the centrality of reliance. By doing so, courts can facilitate shareholders’ participation in the corporate governance structure, and reward investors who inhabit the role of corporate monitor. Because in today’s deregulatory climate the ability of investors to constrain corporate behavior may become critical, the issue takes on a particular urgency.
Keywords: corporations, securities, corporate governance, litigation
JEL Classification: K22
Suggested Citation: Suggested Citation
Lipton, Ann M, Reviving Reliance (March 27, 2017). Fordham Law Review, Forthcoming; Tulane Public Law Research Paper No. 17-3. Available at SSRN: https://ssrn.com/abstract=2941765