Law Commons^™

Shareholder Primacy Versus Shareholder Accountability, William Wilson Bratton

Articles

When corporations inflict injuries in the course of business, shareholders wielding environmental, social, and governance ("ESG") principles can, and now sometimes do, intervene to correct the matter. In the emerging fact pattern, corporate social accountability expands out of its historic collectivized frame to become an internal subject matter-a corporate governance topic. As a result, shareholder accountability surfaces as a policy question for the first time. The Big Three index fund managers, BlackRock, Vanguard, and State Street, responded to the accountability question with ESG activism. In so doing, they defected against corporate legal theory's central tenet, shareholder primacy. Shareholder primacy builds …

Why U.S. States Need Their Own Cannabis Industry Banks, Christoph Henkel, Randall K. Johnson

Faculty Works

The legal cannabis trade is the fastest growing industry in the United States. In 2019, about 48.2 million Americans used the drug at least once. As such, it is easy to see why the legal cannabis trade may generate annual revenues exceeding $30 billion in Fiscal Year 2022 alone.

One inconvenient truth, however, is that the parties to any cannabis trade may face a range of difficulties due to conflicts between federal and state laws. These difficulties include the fact that many financial institutions are reluctant to handle cannabis proceeds. One reason is that a lack of alignment in terms …

Stakeholderism Silo Busting, Aneil Kovvali

Articles by Maurer Faculty

The fields of antitrust, bankruptcy, corporate, and securities law are undergoing tumultuous debates. On one side in each field is the dominant view that each field should focus exclusively on a specific constituency—antitrust on consumers, bankruptcy on creditors, corporate law on shareholders, and securities regulation on financial investors. On the other side is a growing insurgency that seeks to broaden the focus to a larger set of stakeholders, including workers, the environment, and political communities. But these conversations have largely proceeded in parallel, with each debate unfolding within the framework and literature of a single field. Studying these debates together …

Nonvoting Shares And Efficient Corporate Governance, Dorothy S. Lund

Faculty Scholarship

A growing number of technology companies, including Google, Zillow, and Snap, have issued stock that does not allow investors to vote on corporate decisions. But there is fundamental disagreement among scholars and investors about whether nonvoting stock is beneficial or harmful. Critics argue that nonvoting shares perpetually insulate corporate insiders from influence and oversight, and therefore increase agency costs. By contrast, proponents contend that nonvoting shares may provide benefits that exceed these agency costs, such as enabling corporate insiders to pursue their long-term vision for the company without interference from outside shareholders.

This Article offers a novel perspective on this …

Stock-Market Law And The Accuracy Of Public Companies’ Stock Prices, Kevin S. Haeberle

Faculty Publications

The social benefits of more accurate stock prices—that is, stock-market prices that more accurately reflect the future cash flows that companies are likely to produce—are well established. But it is also thought that market forces alone will lead to only a sub-optimal level of stock-price accuracy—a level that fails to obtain the maximum net social benefits, or wealth, that would result from a higher level. One of the principal aims of federal securities law has therefore been to increase the extent to which the stock prices of the most important companies in our economy (public companies) contain information about firms’ …

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 …

Celebrity Ceos: Disclosure At The Intersection Of Privacy And Securities Law, Ann M. Olazábal, Patricia Sánchez Abril

Business Law Articles and Papers

An abstract for this item is not available.

The Supreme Court’S Impact On Securities Class Actions: An Empirical Assessment Of Tellabs, Adam C. Pritchard, Stephen Choi

Law & Economics Working Papers Archive: 2003-2009

Using a sample of securities fraud class actions filed between 2003 and 2007, we study the impact of a widely-followed Supreme Court decision from that period, Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007). This decision clarified the law with respect to one of the most hotly contested issues in securities litigation: pleading scienter. The Tellabs decision reversed a very lenient Seventh Circuit decision with respect to pleading scienter, but replaced it with a standard that is nonetheless relatively generous to plaintiffs. Looking at opinions resolving motions to dismiss decided before and after that decision, we …

London As Delaware?, Adam C. Pritchard

Law & Economics Working Papers Archive: 2003-2009

Regulatory competition has long driven the path of corporate law in the federal system of the United States. Now, jurisdictional competition has spread to exchange listings. New York took an early lead in that competition in the 1990s, but has now been overtaken by London. Can London prevail in the competition for stock listings in the long term? This essay explores that question through the insights offered by Delaware’s dominance in the market for corporate listings. Delaware has prevailed by offering corporate directors a predictable body of that credibly shields directors from the vagaries of political backlash in times of …

Direct And Derivative Claims In Securities Fraud Litigation, Richard A. Booth

Working Paper Series

In the typical securities fraud class action under Rule 10b-5, the plaintiff class consists of buyers who seek damages equal to the difference between the price paid for the stock during the fraud period and the lower price that prevails after corrective disclosure. The argument here is that this claim is really an amalgam of direct and derivative claims and that the derivative claims should result in recovery by the corporation for the benefit of all stockholders. There are three types of losses that arise in the typical stock-drop action. First, part of the loss may be attributable to lower …

Unentrapped, William W. Bratton

All Faculty Scholarship

No abstract provided.

Changing The Paradigm Of Stock Ownership From Concentrated Towards Dispersed Ownership? Evidence From Brazil And Consequences For Emerging Countries, Erica Gorga

Cornell Law Faculty Working Papers

This paper analyzes micro-level dynamics of changes in ownership structures. It investigates a unique event: changes in ownership patterns currently taking place in Brazil. It builds upon empirical evidence to advance theoretical understanding of how and why concentrated ownership structures can change towards dispersed ownership.

Commentators argue that the Brazilian capital markets are finally taking off. The number of listed companies and IPOs in the Sao Paulo Stock Exchange (Bovespa) has greatly increased. Firms are migrating to Bovespa’s special listing segments, which require higher standards of corporate governance. Companies have sold control in the market, and the stock market has …

Five Decades Of Corporation Law - From Conglomeration To Equity Compensation, Richard A. Booth

Working Paper Series

This brief essay recounts developments in corporation law over the last fifty years. It begins with the rise of finance capitalism and the conglomerate corporation which was followed by the emergence of hostile takeovers in the late 1970s and 1980s. One of the key events in this saga was the February 1, 1983 decision by the Delaware Supreme Court in Weinberger v. UOP, Inc. that effectively permitted the at-will elimination of minority stockholders through cashout mergers. Takeovers were also facilitated by two major financial developments: (1) the growth of institutional investors coupled with the growing taste of diversified investors for …

The Use Of The Corporate Monitor In Sec Enforcement Actions, Jennifer O'Hare

Working Paper Series

This paper addresses the SEC’s recent use of the corporate monitor as ancillary relief in its enforcement actions. The corporate monitor represents the latest example of the SEC seeking to shift its enforcement responsibilities to the public companies it regulates. Focusing on the role played by the corporate monitor imposed by the SEC in its enforcement action brought against WorldCom, this paper considers some of the dangers posed by the use of the corporate monitor, such as the whether the appointment of a corporate monitor constitutes impermissible overreaching by the SEC. The paper recognizes that the corporate monitor can be …

Shareholder Primacy's Corporatist Origins: Adolf Berle And The Modern Corporation, William W. Bratton, Michael L. Wachter

All Faculty Scholarship

No abstract provided.

Retail Investor Remedies Under Rule 10b-5, Jennifer O'Hare

Working Paper Series

This paper assesses the private remedies available under Rule 10b-5 to retail investors who have been defrauded by false corporate disclosures. After comparing the treatment received by retail investors to the treatment received by institutional investors, I identify several areas in which the federal securities laws disfavor retail investors who have been defrauded by false corporate disclosures, including the creation of a two-tiered system of investor remedies for securities fraud. Institutional investors are permitted to pick and choose which law and forum offers them the most attractive chance for recovery, but retail investors typically do not have this opportunity. They …

Fiduciary Duties And The Analyst Scandals, Jill E. Fisch

All Faculty Scholarship

No abstract provided.

Criminalization Of Corporate Law: The Impact On Shareholders And Other Constituents, Jill E. Fisch

All Faculty Scholarship

No abstract provided.

Does Analyst Independence Sell Investors Short?, Jill E. Fisch

All Faculty Scholarship

Regulators responded to the analyst scandals of the late 1990s by imposing extensive new rules on the research industry. These rules include a requirement forcing financial firms to separate investment banking operations from research. Regulators argued, with questionable empirical support, that the reforms were necessary to eliminate analyst conflicts of interest and ensure the integrity of sell-side research.

By eliminating investment banking revenues as a source for funding research, the reforms have had substantial effects. Research coverage of small issuers has been dramatically reduced—the vast majority of small capitalization firms now have no coverage at all. The market for research …

Give Me Equity Or Give Me Death - The Role Of Competition And Compensation In Building Silicon Valley, Richard A. Booth

Working Paper Series

In this essay, I argue that the preeminence of Silicon Valley as an incubator of technology companies is attributable to equity compensation. Ronald Gilson, relying on the work of AnnaLee Saxenian and others who have noted the tendency of Silicon Valley employees to job hop, has suggested that California law prohibiting the enforcement of non-compete agreements was a major factor in the rise of Silicon Valley (and the demise of Route 128). I extend this line of thought by suggesting that California employers may have relied on equity compensation as a substitute way to bind employees. I argue further that …

Measuring Efficiency In Corporate Law: The Role Of Shareholder Primacy, Jill E. Fisch

All Faculty Scholarship

The shareholder primacy norm defines the objective of the corporation as maximization of shareholder wealth. Law and economics scholars have incorporated the shareholder primacy norm into their empirical analyses of regulatory efficiency. An increasingly influential body of scholarship uses empirical methodology to evaluate legal rules that allocate power within the corporation. By embracing the shareholder primacy norm, empirical scholars offer normative assessments about regulatory choices based on the effect of legal rules on measures of shareholder value such as stock price, net profits, and Tobin’s Q.

This Article challenges the foundations of using the shareholder primacy norm to judge corporate …

Regulatory Responses To Investor Irrationality: The Case Of The Research Analyst, Jill E. Fisch

All Faculty Scholarship

An extensive body of behavioral economics literature suggests that investors do not behave with perfect rationality. Instead, investors are subject to a variety of biases that may cause them to react inappropriately to information. The policy challenge posed by this observation is to identify the appropriate response to investor irrationality. In particular, should regulators attempt to protect investors from bad investment decisions that may be the result of irrational behavior?

This Article considers the appropriate regulatory response to investor irrationality within the concrete context of the research analyst. Many commentators have argued that analyst conflicts of interest led to biased …

Supersize Pay, Incentive Compatibility, And The Volatile Shareholder Interest, William W. Bratton

All Faculty Scholarship

No abstract provided.

Regulation Nms: Has The Sec Exceeded Its Congressional Mandate To Facilitate A “National Market System” In Securities Trading?, Dale A. Oesterle

The Ohio State University Moritz College of Law Working Paper Series

The SEC is currently holding hearings on sweeping changes to the micro-structure of the country's securities trading markets - modifying the trade through rule, for example. Professor Oesterle argues that the SEC should not be in the business of so structuring the country's securities markets in the first place. In the piece he chronicles the SEC's expansive interpretation of its power under Congress's 1975 National Market System Amendments to the 1934 Securities and Exchange Act and questions whether Congress intended to grant the SEC such a mandate.

Do Institutions Matter? The Impact Of The Lead Plaintiff Provision Of The Private Securities Litigation Reform Act, Stephen Choi, Jill E. Fisch, A. C. Pritchard

All Faculty Scholarship

When Congress enacted the Private Securities Litigation Reform Act in 1995 (“PSLRA”), the Act’s “lead plaintiff” provision was the centerpiece of its efforts to increase investor control over securities fraud class actions. The lead plaintiff provision alters the balance of power between investors and class counsel by creating a presumption that the investor with the largest financial stake in the case will serve as lead plaintiff. The lead plaintiff then chooses class counsel and, at least in theory, negotiates the terms of counsel’s compensation.

Congress’s stated purpose in enacting the lead plaintiff provision was to encourage institutional investors—pension funds, mutual …

The New Dividend Puzzle, William W. Bratton

All Faculty Scholarship

No abstract provided.

Preemption Under The Securities Litigation Uniform Standards Act: If It Looks Like A Securities Fraud Claim And Acts Like A Securities Fraud Claim, Is It A Securities Fraud Claim?, Jennifer O'Hare

Working Paper Series

This Article addresses the removal and preemption provisions of the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”). In SLUSA, Congress preempted class actions alleging “an untrue statement or omission of a material fact in connection with the purchase or sale of a covered security.” SLUSA clearly applies to preempt the typical state securities fraud action, forcing plaintiffs into federal court where they will be subject to the rigorous procedural requirements of the Private Securities Litigation Reform Act of 1995. Preemption of false corporate publicity cases was expected and, in fact, intended by SLUSA. However, many courts have also extended …

Let The Money Do The Governing: The Case For Reuniting Ownership And Control, Usha Rodrigues

Scholarly Works

Part I of the Article outlines the problems with the current method of board selection and functioning. Management or management-sympathetic board members often select the board nominees, who share social ties with other board members. Boards tend to avoid "rocking the boat" by questioning management's recommendations, and because of the way the proxy process is structured, shareholders cannot effectively use their votes to oust unsatisfactory board members.

Part II analyzes the SEC's recent proposals for reform, which center on granting shareholders more opportunities to nominate candidates to the board. These proposals attempt to give shareholders a greater voice in the …

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 …

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 …