Law Commons^™

Panel Presentation: Securities Regulation And Corporate Responsibility, Donald C. Langevoort

Georgetown Law Faculty Publications and Other Works

What I want to do is talk about the big picture, as John suggested, and consider the likely spillover effects of Sarbanes-Oxley. I want to do this in a discretely administrative law-oriented way, taking two themes that were very visible and driving forces behind the legislation. The first, as Mary suggested in her opening remarks, is a question about federalism. It has been common for the last twenty years, at least, to trot out - as John just did - a distinction between federal and state spheres of competency. The SEC is on the disclosure side, while the substance of …

Controlling Controlling Shareholders, Ronald J. Gilson, Jeffrey N. Gordon

Faculty Scholarship

The rules governing controlling shareholders sit at the intersection of the two facets of the agency problem at the core of public corporations law. The first is the familiar principal-agency problem that arises from the separation of ownership and control. With only this facet in mind, a large shareholder may better police management than the standard panoply of market-oriented techniques. The second is the agency problem that arises between controlling and non-controlling shareholders, which produces the potential for private benefits of control. There is, however, a point of tangency between these facets. Because there are costs associated with holding a …

Shareholder Value And Auditor Independence, William W. Bratton

All Faculty Scholarship

This Article questions the practice of framing problems concerning auditors’ professional responsibility inside a principal-agent paradigm. If professional independence is to be achieved, auditors cannot be enmeshed in agency relationships with the shareholders of their audit clients. As agents, the auditors by definition become subject to the principal’s control and cannot act independently. For the same reason, auditors’ duties should be neither articulated in the framework of corporate law fiduciary duty, nor conceived relationally at all. These assertions follow from an inquiry into the operative notion of the shareholder-beneficiary. The Article unpacks the notion of the shareholder and tells a …

Avoiding Moral Bankruptcy, David A. Skeel Jr.

All Faculty Scholarship

Faced with hundreds of clergy sexual misconduct cases last year, the Archdiocese of Boston hinted that it was considering filing for bankruptcy. Although it is hard to imagine an archdiocese or church filing for bankruptcy, bankruptcy has become an important forum for many social issues that cannot be easily resolved elsewhere. This Article explores the implications of a religious organization bankruptcy filing by focusing on four problems with the bankruptcy alternative: the possibility of dismissal for being filed in bad faith; the question of what church assets are subject to the process; the fact that the church might be subject …

Is There A Role For Lawyers In Preventing Future Enrons?, Jill E. Fisch, Kenneth M. Rosen

All Faculty Scholarship

Following the collapse of the Enron Corporation, the ethical obligations of corporate attorneys have received increased scrutiny. The Sarbanes-Oxley Act of 2002, enacted in response to calls for corporate reform, specifically requires the Securities and Exchange Commission to address the lawyer’s role by requiring covered attorneys to “report up” evidence of corporate wrongdoing to key corporate officers, and, in some circumstances, to the board of directors. Failure to “report up” subjects a lawyer to liability under federal law.

This Article argues that the reporting up requirement reflects a second-best approach to corporate governance reform. Rather than focusing on the actors …

The Qualified Legal Compliance Committee: Using The Attorney Conduct Rules To Restructure The Board Of Directors, Jill E. Fisch, Caroline M. Gentile

All Faculty Scholarship

The Securities and Exchange Commission introduced a new corporate governance structure, the qualified legal compliance committee, as part of the professional standards of conduct for attorneys mandated by the Sarbanes-Oxley Act of 2002. QLCCs are consistent with the Commission’s general approach to improving corporate governance through specialized committees of independent directors. This Article suggests, however, that assessing the benefits and costs of creating QLCCs may be more complex than is initially apparent. Importantly, QLCCs are unlikely to be effective in the absence of incentives for active director monitoring. This Article concludes by considering three ways of increasing these incentives.

How To Fix Wall Street: A Voucher Financing Proposal For Securities Intermediaries, Stephen Choi, Jill E. Fisch

All Faculty Scholarship

No abstract provided.

The Case For Repealing The Corporate Alternative Minimum Tax, Terrence R. Chorvat, Michael S. Knoll

All Faculty Scholarship

No abstract provided.

Focusing Failures In Competitive Environments: Explaining Decision Errors In The Monty Hall Game, The Acquiring A Company Problem, And Multiparty Ultimatums, Avishalom Tor, Max Bazerman

Journal Articles

This paper offers a unifying conceptual explanation for failures in competitive decision-making across three seemingly unrelated tasks: the Monty Hall game (Nalebuff, 1987), the Acquiring a Company problem (Samuelson & Bazerman, 1985), and multiparty ultimatums (Messick, Moore, & Bazerman, 1997). We argue that the failures observed in these three tasks have a common root. Specifically, due to a limited focus of attention, competitive decision-makers fail properly to consider all of the information needed to solve the problem correctly. Using protocol analyses, we show that competitive decision-makers tend to focus on their own goals, often to the exclusion of the decisions …

Corporate Control Transactions: Introduction, Edward B. Rock, Michael L. Wachter

All Faculty Scholarship

No abstract provided.

Takeover Defense When Financial Markets Are (Only) Relatively Efficient, Michael L. Wachter

All Faculty Scholarship

This paper evaluates the impact of developments in the understanding of asset value pricing for alternative legal standards for takeover defenses: the management discretion and the shareholder rights positions. Both sides place considerable, albeit implicit, reliance on alternative views of the efficiency of financial markets. Developments in finance theory show that when financial markets are only "relatively efficient," stock prices can incorrectly value the corporation at any point in time, at the same time as investors cannot outperform the market on an ongoing basis. I focus on financial market anomalies arising from the failure of the capital asset pricing model …

Business Law Reform In The United States: Thinking Too Small?, Douglas C. Michael

Law Faculty Scholarly Articles

Dean Johan Henning presents the South African experience with business entity reform as one part of a coordinated whole. It included, for example, government funding for business, tax reforms, accounting and securities changes. Henning says that these reforms, though multi-faceted, had a uniform purpose: to use small business as an engine to improve the economy and to move “historically and socially disadvantaged groups” into the mainstream of the economy and the society.

These are noble goals and far reaching efforts, and a lot to ask of business entity reform. But because the South African experience was nonetheless successful by all …

The Impact Of Modern Finance Theory In Acquisition Cases, Rutheford B. Campbell Jr.

Law Faculty Scholarly Articles

In February of 1983, the Supreme Court of Delaware decided Weinberger v. UOP, Inc. The case holds that, in determining the present value of a corporation involved in an acquisition, courts are free to use “any techniques or methods [of valuation] which are generally considered acceptable in the financial community…”

The rule in Delaware prior to Weinberger required courts to determine the present value of a corporation by use of the Delaware block method of valuation exclusively. The Delaware block method, however, is a poor way to determine the present value of a corporation. As a result, even before the …

The Corporation As Symphony: Are Shareholders First Violin Or Second Fiddle?, Janis P. Sarra

All Faculty Publications

This article focuses on shareholders and whether the current regime affords them adequate protection and participation rights. Recent changes to corporate and securities laws have facilitated the exercise of shareholder voice. These changes are important to capital markets in that they are aimed at increasing investor confidence and hence the strength of markets. The lead in shareholder activism is being taken by institutional shareholders who are utilizing new proxy and proposal provisions to express governance preferences regarding key issues such as independence of audit committees and enhanced transparency in financial disclosures. However, there continue to be barriers that institutional and …

Redefining The Fiduciary Duties Of Corporate Directors In Accordance With The Team Production Model Of Corporate Governance, Gregory S. Crespi

Faculty Journal Articles and Book Chapters

This article considers the "team production model" (TPM) of corporate governance set forth and elaborated upon by Margaret Blair and Lynn Stout. The author initially addresses how the locus of fiduciary duties should be respecified to be consistent with the TPM framework of corporate governance, should that paradigm be determined to be a descriptively more accurate model of public corporations than is the conventional agency mode, and then reviews the relatively complex calculations that would have to be carried out to determine how the performance of a TPM-style corporate board of directors measures up against these respecified fiduciary duties. Finally, …

The Costs And Benefits Of Precommitment: An Appraisal Of Omnicare V. Ncs Healthcare, Sean J. Griffith

Faculty Scholarship

The Decision of the Delaware Supreme Court in Omnicare v. NCS Healthcare raises concerns regarding the efficiency of Delaware law from the perspective of shareholder welfare maximization and engages the emerging literature on corporate precommitments. The clash between the majority and dissenting opinions offers competing visions of the basic corporate law separation of powers issue--that is, board versus shareholder primacy. This Article engages in a close analysis of the Omnicare opinion, focusing on its doctrinal foundations as well as its policy implications. After this introduction, Part II provides a brief overview of the relevant factual and legal background. Part III …

Just Do It: An Antidote To The Poison Pill, Julian Velasco

Journal Articles

The poison pill is the most powerful defense against hostile takeovers. It can render a company takeover-proof, or nearly so. Efforts at developing an antidote have focused largely on shareholder-adopted bylaws, but the legality of such proposals has been questioned by many. In any event, shareholder-adopted bylaws have not been very successful in eliminating poison pills thus far. In order to effect takeovers, hostile bidders cannot rely on the courts or the target company's shareholders; they can rely only on themselves. In this article, I propose a strategy for hostile bidders to counteract the poison pill and to consummate hostile …

Enron, Titanic, And The Perfect Storm, Nancy B. Rapoport

Scholarly Works

This article explores the contention of Jeffrey Skilling, former Enron CEO, that Enron's debacle was due to a perfect storm of events. It rejects his contention, arguing instead that Enron's downfall was more like Titanic's - hubris and an over-reliance on checks and balances led to Enron's downfall. The article then explores how character (especially of those at the top of an organization) can lead to Enron-like disasters, and discusses how cognitive dissonance can lead to very smart people making very stupid decisions. It ends with some musings about how lawyers can learn from Enron.

The Securities Analyst As Agent: Rethinking The Regulation Of Analysts, Jill E. Fisch, Hillary A. Sale

All Faculty Scholarship

Recent press has highlighted shocking examples of bias, self-dealing, and inaccuracy in the behavior of the securities analyst. Critics have attributed the bubble and subsequent crash in the technology sector to analyst hype and posited that undue analyst optimism contributed to scandals such as Enron. After many years of minimal regulator oversight analysts are now the subject of extensive regulatory reform proposals, including a mandate in the Sarbanes-Oxley Act of 2002 requiring that the Securities and Exchange Commission adopt a variety of restrictions on analyst behavior.

Despite the media attention, there have been few attempts to conceptualize carefully the analyst's …

Defeating Class Certification In Securities Fraud Actions, Kermit Roosevelt Iii

All Faculty Scholarship

No abstract provided.

Governance Failures Of The Enron Board And The New Information Order Of Sarbanes-Oxley, Jeffrey N. Gordon

Faculty Scholarship

Analysis of the corporate governance crisis that manifested itself in the United States at the turn of the millennium requires separating its various strands. The Enron Corporation ("Enron") debacle and the dot corn bubble and collapse, for example, share some common elements but in other ways they are quite different. In both cases investors became aggressively enamored of an unsustainable business model. In the dot com case it was the belief that an innovator in a rapidly growing market could attain powerful first mover advantages that would produce an eventual cascade of profits, so that a current and increasing stream …

The Efficiency Of Controlling Corporate Self-Dealing: Theory Meets Reality, Zohar Goshen

Faculty Scholarship

Corporate self-dealing may be controlled either by legal rules or by the unconstrained forces of the market. The regulatory options include an absolute prohibition on self-dealing, a prohibition on voting with conflicting interests (the "majority of the minority" requirement), and an imposition of fairness duties (the 'fairness test"). Using an economic analysis, this Article presents a unique theoretical framework for evaluating the relative efficiency of the attempts to control self-dealing adopted by five countries: The United States (Delaware in particular), the United Kingdom, Canada, Germany, and Italy.

The Article's analysis of the self-dealing problem is based on the novel theory …

Enron, Sarbanes-Oxley And Accounting: Rules Versus Principles Versus Rents, William W. Bratton

All Faculty Scholarship

No abstract provided.

Local Institutions, Foreign Investment And Alternative Strategies Of Development: Some Views From Practice, Tamara Lothian, Katharina Pistor

Faculty Scholarship

This Essay summarizes the major insights gained from a panel discussion with legal practitioners about the relevance of local institutions to foreign direct investors. The Essay offers a critique of policy conclusions drawn from empirical studies that suggest a positive correlation between legal institutions and foreign investment flows. It points out that the data used in these studies are far too general to allow policy conclusions and that neither the data nor the policy conclusions are sufficiently attuned to the challenges or opportunities that foreign direct investment projects face on the ground. According to the results of the panel discussion, …

Unregulable Defenses And The Perils Of Shareholder Choice, Jennifer Arlen, Eric L. Talley

Faculty Scholarship

A significant debate rages within corporate law scholarship as to whether shareholders or managers should be granted authority over the tender offer process once a bid is imminent. Both sides generally agree that the issue depends on whether shareholders are capable of exercising informed choice over takeover bids. Supporters of managerial veto power contend that the arguments favoring professional management of publicly held firms carry over into the tender offer context. Proponents of shareholder choice, on the other hand, argue that shareholders can act on their own behalf in the special circumstances surrounding contests for corporate control.

This Article challenges …

Innovation In Corporate Law, Katharina Pistor, Yoram Keinan, Jan Kleinheisterkamp, Mark D. West

Faculty Scholarship

In most countries large business enterprises today are organized as corporations. The corporation with its key attributes of independent personality, limited liability and free tradeability of shares has played a key role in most developed market economies since the 19th century and has made major inroads in emerging markets. We suggest that the resilience of the corporate form is a function of the adaptability of the legal framework to a changing environment. We analyze a country's capacity to innovate using the rate of statutory legal change, the flexibility of corporate law, and institutional change as indicators. Our findings suggest that …

Robust Public Debate: Realizing Free Speech In Workplace Representation Elections, Kate Andrias

Faculty Scholarship

The First Amendment stands as a guarantor of political freedom and as the “guardian of our democracy.” It seeks to expand the vitality of public discourse in order to enable Americans to become aware of the issues before them and to pursue their ends fully and freely. As the Supreme Court wrote in the canonical case of New York Times Co. v . Sullivan, the First Amendment’s function is to create the “uninhibited, robust and wide-open” public debate necessary for the exercise of self-governance.

The Amendment plays a prominent role in the regulation of workplace representation elections, the process …

Employee Stock Ownership After Enron: Proceedings Of The 2003 Annual Meeting, Association Of American Law Schools Section On Employee Benefits, Norman P. Stein, Colleen E. Medill, Susan J. Stabile, Jeffrey N. Gordon, Louis H. Diamond, Damon Silvers, Patricia E. Dilley

Faculty Scholarship

This session is entitled "Employee Stock Ownership After Enron," and I assume that title has drawn into this room people who know something about either Enron or employee stock, or both. For our purposes, the Enron story has as its focus the Enron 401(k) plan, which was the principal retirement plan for most Enron employees. Employees could make elective contributions to the 401(k) plan, which offered nineteen investment options, one of which was Enron stock. The 401(k) plan also provided that Enron would match employee contributions up to 3 percent of compensation. Enron's match, however, was made in Enron stock. …

Engineering A Venture Capital Market: Lessons From The American Experience, Ronald J. Gilson

Faculty Scholarship

The venture capital market and firms whose creation and early stages were financed by venture capital are among the crown jewels of the American economy. Beyond representing an important engine of macroeconomic growth and job creation, these firms have been a major force in commercializing cutting-edge science, whether through their impact on existing industries as with the radical changes in pharmaceuticals catalyzed by venture-backed firms' commercialization of biotechnology, or by their role in developing entirely new industries as with the emergence of the Internet and World Wide Web. The venture capital market thus provides a unique link between finance and …

Ethics, Law Firms, And Legal Education, Milton C. Regan

Georgetown Law Faculty Publications and Other Works

A rash of recent corporate scandals has once again put professional ethics in the spotlight. It's hard to pick up the Wall Street Journal each day and not read that authorities have launched a new investigation or that additional indictments are imminent. Stories of financial fraud and outright looting have galvanized the public and shaken the economy. What ethical lessons can we draw from these events? Two explanations seem especially prominent. The first is a story of individuals without an adequate moral compass. Some people's greed and ambition were unchecked by any internal ethical constraints. For such deviants, no amount …