Securities Law Commons^™

On The Role And Regulation Of Proxy Advisors, Paul Rose

Michigan Law Review First Impressions

In anticipation of proxy season-the springtime ritual where companies prepare and deliver proxy statements in preparation for annual shareholder meetings-U.S. public companies typically reexamine their corporate governance structures and policies. Many corporate governance structures that were acceptable ten years ago are now considered outmoded or even evidence of managerial entrenchment. For example, consider the classified board of directors. In recent years, many companies have shifted from a classified board of directors to an annually elected board. A company might adopt an annually-elected board structure for a number of reasons. A classified board can serve as an entrenchment device, for instance, …

Are Investors’ Gains And Losses From Securities Fraud Equal Over Time? Theory And Evidence, Alicia J. Davis

Law & Economics Working Papers

Most leading securities regulation scholars argue that compensating securities fraud victims is inefficient. They maintain that because diversified investors that trade frequently are as likely to gain from trading in fraud-tainted stocks as they are to suffer harm from doing so, these investors should have no expected net losses from fraud over the long term. This assertion, which analogizes trading in fraud-tainted stocks to participating in a coin toss game in which players win $1 on heads and lose $1 on tails, is problematic for a number of reasons. First, even if we accept this analogy, probability theory holds that …

The Redemption Puzzle, Reuven S. Avi-Yonah

Articles

After the adoption of partial integration in 2003, there has been only a modest rise in dividends, but a sixfold increase in redemptions. This article argues that the explanation for that lies in the different treatment of dividends and capital gains to foreign shareholders and that Congress should respond by making sections 302 and 304 inapplicable to foreign shareholders.

Turning A Short-Term Fling Into A Long-Term Commitment: Board Duties In A New Era, Nadelle Grossman

University of Michigan Journal of Law Reform

Corporate boards face significant pressure to make decisions that maximize profits in the short run. That pressure comes in part from executives who are financially rewarded for short-term profits despite the long-term risks associated with those profit-making activities. The current financial crisis, where executives at AIG and numerous other institutions ignored the long-term risks associated with their mortgage backed securities investments, arose largely because those executives were compensated for the short-term profits generated by those investments despite their longer-term risks. Pressure on boards for short-term profits also comes from activist investors who seek to make quick money off of trading …

Securities Intermediaries And The Separation Of Ownership From Control, Jill E. Fisch

All Faculty Scholarship

The Modern Corporation and Private Property highlighted the evolving separation of ownership and control in the public corporation and the effects of that separation on the allocation of power within the corporation. This essay explores the implications of intermediation for those themes. The article observes that intermediation, by decoupling economic ownership and decision-making authority within the shareholder, creates a second layer of agency issues beyond those identified by Berle and Means. These agency issues are an important consideration in the current debate over shareholder empowerment. The article concludes by considering the hypothetical shareholder construct implicit in the Berle and Means …

Evolving Regulation Of Corporate Governance And The Implications For D&O Liability: The United States And Australia, Joan T.A. Gabel, Nancy R. Mansfield, Paul Von Nessen, Austin W. Hall, Andrew Jones

San Diego International Law Journal

This Article compares the modern corporate regulatory environments in the United States and Australia, including an analysis of the climate for Directors & Officers (D & O) liability coverage. Comparing these regulations across two large markets with similar historical bases for assessing director and officer liability allows us to explore which reforms may be more effective as new scandals emerge.

Cleaning The Murky Safe Harbor For Forward-Looking Statements: An Inquiry Into Whether Actual Knowledge Of Falsity Precludes The Meaningful Cautionary Statement Defense, Allan Horwich

Faculty Working Papers

Congress included a safe harbor for forward-looking statements in the 1995 Private Securities Litigation Reform Act. This affords certain issuers and other specified persons limited protection from civil liability for damages under the Securities Act of 1933 and the Securities Exchange Act of 1934 when the projections or objectives in a forward-looking statement are not realized, i.e., turn out to be false. The safe harbor contains two principal elements, in addition to protection for "immaterial" statements: one prong where projections are accompanied by "meaningful cautionary statements," the second prong where the plaintiff fails to prove that the speaker made the …

Breaking Bucks: Sec Regulation By Obfuscation, William A. Birdthistle

All Faculty Scholarship

This Article argues that the Securities and Exchange Commission’s first and most significant response to the economic crisis profoundly contradicts widely accepted theoretical and regulatory approaches to financial oversight. More alarmingly, the SEC’s newest rules increase rather than decrease the likelihood of future failures in money market funds and the broader capital markets.

Scholars – of both neoclassical and behavioral economic theory – have long insisted that transparency and disclosure play essential roles in ensuring efficient capital markets and sound financial regulation. Professors Gilson and Kraakman notably argued that the efficient capital market hypothesis, and its reliance on a market …

Tracking Berle's Footsteps: The Trail Of The Modern Corporation's Law Chapter, William W. Bratton, Michael L. Wachter

All Faculty Scholarship

No abstract provided.

The Case For Semi-Strong-Form Corporate Scienter In Securities Fraud Actions, Paul B. Maslo

Michigan Law Review First Impressions

The mental state of scienter - intent to defraud - is a required element of a securities fraud claim. The scienter inquiry is fairly straightforward when the defendant is an individual. It is more complex when a corporate entity is involved because a corporation can only act through its agents; it has no mind of its own. This article compares the three approaches courts have used to impute scienter to corporate defendants in the securities fraud context and concludes by recommending the approach which strikes an appropriate balance between several dueling public policy concerns.

The Power Of Proxy Advisors: Myth Or Reality?, Stephen Choi, Jill E. Fisch, Marcel Kahan

All Faculty Scholarship

Recent regulatory changes increasing shareholder voting authority have focused attention on the role of proxy advisors. In particular, greater shareholder empowerment raises the question of how much proxy advisors influence voting outcomes.

This Article analyzes the significance of voting recommendations issued by four proxy advisory firms in connection with uncontested director elections. We find, consistent with press reports, that Institutional Shareholder Services (ISS) is the most powerful proxy advisor and that, of the others, only Glass, Lewis & Co. seems to have a meaningful impact on shareholder voting. This Article also attempts to measure the impact of voting recommendations on …

Foreword: In Berle’S Footsteps, Charles R.T. O'Kelley

Seattle University Law Review

On the weekend of November 6–8, 2009, scholars from around the world gathered in Seattle for a symposium—In Berle’s Footsteps—celebrating the launch of the Adolf A. Berle, Jr. Center on Corporations, Law and Society. As founding director of the Berle Center, I described our undertaking: “It is with a profound sense of obligation to the legacy that has been entrusted to my care, that I announce the launching of the Adolf A. Berle, Jr. Center on Corporations, Law and Society. It is a privilege to follow in Berle’s footsteps.”

Opening Remarks, Chancellor William B. Chandler Iii

Seattle University Law Review

Law is, in many ways, a backwards-looking field. We litigate over facts that have already occurred, challenge deals that have already been signed, and apply rules of decision based on previously-established precedent or statutes already enacted. To the extent that this Center and the symposium reflect on Berle’s work, they too are an exercise in looking back. Indeed, some might say the establishment of a Center named in Berle’s honor is a monument to the past.

Securities Intermediaries And The Separation Of Ownership From Control, Jill E. Fisch

Seattle University Law Review

The Modern Corporation & Private Property is a paradigm-shifting analysis of the modern corporation. The book is perhaps best known for the insights of Berle and Means about the separation of ownership from control and the consequences of that separation for the allocation of power within the corporation. The Berle and Means story focuses on the shareholder as the owner of the corporation. Berle and Means saw the mechanism of centralized management—in which the shareholder retains the economic interest but not the control rights associated with ownership—as threatening the conception of shareholder interests in terms of property rights. In particular, …

Rethinking The Separation Of Ownership From Management In American History, Kenneth Lipartito, Yumiko Morii

Seattle University Law Review

In <em>The Modern Corporation and Private Property</em>, Adolf Berle and Gardiner Means would use AT&T as a prime example of what they saw as a dangerous new trend, the replacement of ownership-based capitalism with giant corporations controlled by a small group of propertyless managers. Indeed, AT&T became Berle and Means’ favorite example. . . . As we shall see, however, the claim that AT&T was a leading example of the separation of ownership from management is incomplete. More importantly, the common interpretation of Berle and Means’ work is mistaken, placing the emphasis incorrectly on the number of shareholders and reading …

The Modern Corporation As Social Construction, Mark S. Mizruchi, Daniel Hirschman

Seattle University Law Review

Classic works, Mark Mizruchi and Lisa Fein argued, share a particular fate. Authors often cite classic works without reading them—or without reading them carefully. . . . Yet perhaps no single work fits the above description better than one of the most important books on the large corporation ever published: Adolf Berle and Gardiner Means’s The Modern Corporation and Private Property. One can speculate that few works in the social sciences have been as often cited and as little read. As a consequence, we would expect The Modern Corporation to be a good candidate for either selective interpretation or …

Berle And The Entrepreneur, Charles R.T. O'Kelley

Seattle University Law Review

In the first and last four chapters (“the Five Chapters”) of The Modern Corporation and Private Property, Adolf Berle, Jr. describes in sweeping terms a fundamental transformation of the American economy. . . . Writing more than ten years before Berle, another seminal scholar, Frank Knight . . . developed a theory of the entrepreneur as part of his larger effort to more carefully explain the theoretical underpinnings of a free-market economy. . . . Given Knight’s prominence and the fact that Knight apparently reached dramatically different conclusions than did Berle concerning the consequences flowing from separation of ownership …

Revisiting Berle And Rethinking The Corporate Structure, Kelli A. Alces

Seattle University Law Review

Adolf Berle and Gardiner Means painted what remains a defining portrait of corporate law. The separation of ownership and control they described and the agency costs it causes are still a central concern of the law of corporate governance. For that reason, Berle’s work is relevant nearly eighty years after its publication. Seemingly forgotten, however, is that Berle’s enduring description of the corporate structure was published before most of today’s corporate law was in place. His work preceded the Securities Act of 1933 and the Securities Exchange Act of 1934 and even preceded the dominance of Delaware common law in …

Monitoring To Reduce Agency Costs: Examining The Behavior Of Independent And Non-Independent Boards, Anita Anand, Frank Milne, Lynnette Purda

Seattle University Law Review

Berle and Means’s analysis of the corporation—in particular, their view that those in control are not the owners of the corporation—raises questions about actions that corporations take to counter concerns regarding management’s influence. What mechanisms, if any, do corporations implement to balance the distribution of power in the corporation? To address this question, we analyze boards of directors’ propensity to voluntarily adopt recommended corporate governance practices. Because board independence is one way to enhance shareholders’ ability to monitor management, we probe whether firms with independent boards of directors (which we define as boards with either an independent chair or a …

Power Without Property, Still: Unger, Berle, And The Derivatives Revolution, Cristie Ford, Carol Liao

Seattle University Law Review

We are in a time when the notion of property is in flux. The derivatives revolution has shattered the “atom of property” well beyond what was originally imagined in 1932 by Adolf Berle and Gardiner Means. This disaggregation has had fascinating, and often adverse, effects on corporate law and securities regulation. Moreover, the phenomenon has had the unexpected effect of permitting some parties that already possess considerable social, economic, and political power to accumulate even more.

The New Financial Assets: Separating Ownership From Control, Tamar Frankel

Seattle University Law Review

In The Modern Corporation and Private Property, Adolf A. Berle and Gardiner Means wrote about the separation of ownership from control in corporations. They noted that the interests of the controlling directors and managers can diverge from those of the shareholder owners of the firm. . . . There are those who consider such a decoupling beneficial. Others express the same concern that Berle and Means have expressed. And depending on what one focuses on in viewing the pluses and minuses of these separations, one could reach different conclusions. I reach a number of conclusions. First, the separation of …

Neo-Brandeisianism And The New Deal: Adolf A. Berle, Jr., William O. Douglas, And The Problem Of Corporate Finance In The 1930s, Jessica Wang

Seattle University Law Review

This essay revisits Adolf A. Berle, Jr. and The Modern Corporation and Private Property by focusing on the triangle of Berle, Louis D. Brandeis, and William O. Douglas in order to examine some of the underlying assumptions about law, economics, and the nature of modern society behind securities regulation and corporate finance in the 1930s. I explore Douglas and Berle’s academic and political relationship, the conceptual underpinnings of Brandeis, Berle, and Douglas’s critiques of modern finance, and the ways in which the two younger men—Berle and Douglas—ultimately departed from their role model, Brandeis.

Enumerating Old Themes? Berle’S Concept Of Ownership And The Historical Development Of English Company Law In Context, Lorraine E. Talbot

Seattle University Law Review

This paper offers some tentative suggestions as to why Berle’s work has been read and interpreted so selectively in the United Kingdom. I suggest that this must be partly attributable to the historical developments in English company law that entrenched the notion of shareholder ownership claims. Specifically, unincorporated associations’ normative values—that members are owners and there is no distinction between small organizations with no share dispersal and large organizations with wide share dispersal—have a continuing influence on this entrenched notion of shareholder ownership claims. First, I provide an overview of the origins of English company law. Next, I address how …

Berle’S Vision Beyond Shareholder Interests: Why Investment Bankers Should Have (Some) Personal Liability, Claire Hill, Richard Painter

Seattle University Law Review

This essay, published in a symposium on the work of Adolf Berle, approaches the Berle-Dodd debate from the perspective that corporate managers have responsibilities beyond pursuing the interests of shareholders. Stock based executive compensation, designed to align managers’ interests with those of shareholders, has, in the investment banking industry in particular, failed to avert, and may have caused, managers (in this case, bankers) to take excessive risks that in the present financial crisis inflicted great damage on creditors and on society as a whole. We describe here the broad outlines of a proposal that we will discuss in future publications …

The Birth Of Corporate Governance, Harwell Wells

Seattle University Law Review

Part I of this Article briefly examines the concept of “corporate governance” and argues for dating the concept’s origins to the debates of the 1920s. Part II then moves on to examine early scholarly and popular discussions of the separation of ownership and control. After surveying the historical developments that produced the recognizably modern corporate economy around the turn of the century, it examines early scholarly and popular discussions of the separation of ownership and control, focusing on three major thinkers, Louis D. Brandeis, Walter Lippmann, and Thorstein Veblen. It argues that, while each of these authors examined the separation …

Tracking Berle’S Footsteps: The Trail Of The Modern Corporation’S Last Chapter, William W. Bratton, Michael L. Wachter

Seattle University Law Review

Readers game enough to work through all three hundred pages of The Modern Corporation and Private Property looking for insights on corporate law today encounter two, apparently contradictory, lines of thought. One line, set out in Books II and III, resonates comfortably with today’s shareholder-centered corporate legal theory. Here the book teaches that even as ownership and control have separated, managers should function as trustees for the shareholders and so should exercise their wide-ranging powers for the shareholders’ benefit. The other line of thought emerges in Books I and IV, where The Modern Corporation encases this shareholder trust model in …

See No Evil? Revisiting Early Visions Of The Social Responsibility Of Business: Adolf A. Berle’S Contribution To Contemporary Conversations, Erika George

Seattle University Law Review

Much corporate legal scholarship considers such fact patterns as beyond the scope of the discipline’s core concerns. Yet, increasingly, questions are asked concerning the scale and scope of modern corporate power. This Article will challenge the conventional understanding of what the core discipline of corporate law should encompass and argues that the failure to focus on precisely these sorts of factual scenarios involving allegations of corporate complicity in human rights violations and environmental degradation is misguided and short-sighted.

Then And Now: Professor Berle And The Unpredictable Shareholder, Jennifer G. Hill

Seattle University Law Review

Shareholders, and the relationship between shareholders and management, lay at the heart of Professor Berle’s scholarship. The goal of this Article is to compare the image of shareholders emerging from The Modern Corporation and Private Property and the Berle/Dodd debate with a range of contemporary visions of the shareholder that underpin some international regulatory responses to recent financial debacles, from Enron to the current global financial crisis. As the Article dis- cusses, these recent developments in the era of financial crises have prompted a reevaluation of the traditional image of the shareholder—and the role of the shareholder in the modern …

Corporate Power In The Public Eye: Reassessing The Implications Of Berle’S Public Consensus Theory, Marc T. Moore, Antoine Rebérioux

Seattle University Law Review

We analyze Berle’s overall corporate governance project in accordance with what we see as its four core sub-themes: (A) the limitations of external market forces as a constraint on managerial decision-making power; (B) the desirability of internal (corporate) over external (market) actors in allocating corporate capital; (C) civil society and the public consensus as a continuous informal check on managerial decision-making power; and (D) shareholder democracy (as opposed to shareholder primacy or shareholder wealth maximization) as a socially instrumental institution. We seek to debunk the popular misconception that Berle’s early work was a defense of the orthodox shareholder primacy paradigm …

Lyondell: A Note Of Approbation, William W. Bratton

All Faculty Scholarship

No abstract provided.