Law Commons^™

The New Public/Private Equilibrium And The Regulation Of Public Companies, Elisabeth De Fontenay, Gabriel Rauterberg

Faculty Scholarship

This Symposium Article examines how the public/private divide works today and maps out some of the potential implications for major issues in securities law. Classic debates in securities law were often predicated on the idea that public companies are a coherent class of firms that differ markedly from private companies. For more than fifty years after the adoption of the federal securities laws, this view was justified. During that period, the vast majority of successful and growing private firms eventually accepted the regulatory obligations of being public in order to access a wider and deeper pool of capital, among other …

Whitman And The Fiduciary Relationship Conundrum, Lisa Fairfax

All Faculty Scholarship

While the law on insider trading has been convoluted and, in Judge Jed S. Rakoff’s words, “topsy turvy,” the law on insider trading is supposedly clear on at least one point: insider trading liability is premised upon a fiduciary relationship. Thus, all three seminal U.S. Supreme Court cases articulating the necessary elements for demonstrating any form of insider trading liability under § 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 made crystal clear that a fiduciary relationship represented the lynchpin for such liability.

Alas, insider trading law is not clear about the source from which the fiduciary …

Federal Forum Provisions And The Internal Affairs Doctrine, Dhruv Aggarwal, Albert H. Choi, Ofer Eldar

Articles

A key question at the intersection of state and federal law is whether corpo- rations can use their charters or bylaws to restrict securities litigation to federal court. In December 2018, the Delaware Chancery Court answered this question in the negative in the landmark decision Sciabacucchi v. Salzberg. The court invalidated “federal forum provisions” (“FFPs”) that allow companies to select federal district courts as the exclusive venue for claims brought under the Secur- ities Act of 1933 (“1933 Act”). The decision held that the internal affairs doc- trine, which is the bedrock of U.S. corporate law, does not permit charter …

High Crimes: Liability For Directors Of Retail Marijuana Corporations, Lauren A. Newell

Law Faculty Scholarship

Selling retail marijuana in the United States is illegal — or is it? A rising number of states have legalized the retail sale of marijuana and are busily regulating these sales and the companies that make them. Even so, the sale of marijuana is a crime under federal law. Are companies that sell retail marijuana duly sanctioned, productive contributors to their state economies, or are they felons just waiting for the wheels of justice to turn in their direction? At this moment, no one can answer that question with certainty.

What is certain is that more companies are being formed …

Making Sustainability Disclosure Sustainable, Jill E. Fisch

All Faculty Scholarship

Sustainability is receiving increasing attention from issuers, investors and regulators. The desire to understand issuer sustainability practices and their relationship to economic performance has resulted in a proliferation of sustainability disclosure regimes and standards. The range of approaches to disclosure, however, limit the comparability and reliability of the information disclosed. The Securities & Exchange Commission (SEC) has solicited comment on whether to require expanded sustainability disclosures in issuer’s periodic financial reporting, and investors have communicated broad-based support for such expanded disclosures, but, to date, the SEC has not required general sustainability disclosure.

This Article argues that claims about the relationship …

Texas Gulf Sulphur And The Genesis Of Corporate Liability Under Rule 10b-5, Adam C. Pritchard, Robert B. Thompson

Articles

This Essay explores the seminal role played by SEC v. Texas Gulf Sulphur Co. in establishing Rule 10b-5’s use to create a remedy against corporations for misstatements made by their officers. The question of the corporation’s liability for private damages loomed large for the Second Circuit judges in Texas Gulf Sulphur, even though that question was not directly at issue in an SEC action for injunctive relief. The judges considered both, construing narrowly “in connection with the purchase or sale of any security,” and the requisite state of mind required for violating Rule 10b-5. We explore the choices of the …

Sunrise, Sunset: An Empirical And Theoretical Assessment Of Dual-Class Stock Structures, Andrew William Winden

UF Law Faculty Publications

A battle is brewing for control of America’s most dynamic companies. Entrepreneurs are increasingly seeking protection from interference or dismissal by public investors through the adoption of dual-class stock structures in initial public offerings. Institutional investors are pushing back, demanding that sucks structures be abandoned or strictly limited through subset provisions. The actual terms of dual-class stock structures, however, have been remarkably understudied, so the debate between proponents of prohibition and private ordering is ill-informed. This paper presents the first empirical analysis of the initial, or sunrise, and terminal, or sunset, provisions found in the charters of dual-class companies, with …

The New Bond Workouts, William W. Bratton, Adam J. Levitin

All Faculty Scholarship

Bond workouts are a famously dysfunctional method of debt restructuring, ridden with opportunistic and coercive behavior by bondholders and bond issuers. Yet since 2008 bond workouts have quietly started to work. A cognizable portion of the restructuring market has shifted from bankruptcy court to out-of-court workouts by way of exchange offers made only to large institutional investors. The new workouts feature a battery of strong-arm tactics by bond issuers, and aggrieved bondholders have complained in court. The result has been a new, broad reading of the primary law governing workouts, section 316(b) of the Trust Indenture Act of 1939 (“TIA”), …

Private Enforcement Of Company Law And Securities Regulation In Korea, Hwa-Jin Kim

Book Chapters

This chapter offers a brief overview of the private enforcement of corporate law and securities regulation in Korea, with particular reference to the current legislative efforts in the Korean National Assembly and recent court cases. This chapter also talks about Korea’s ill-fated and misguided adoption of the fraud-on-the-market theory in securities fraud litigation.

The Deregulation Of Private Capital And The Decline Of The Public Company, Elisabeth De Fontenay

Faculty Scholarship

From its inception, the federal securities law regime created and enforced a major divide between public and private capital raising. Firms that chose to “go public” took on substantial disclosure burdens, but in exchange were given the exclusive right to raise capital from the general public. Over time, however, the disclosure quid pro quo has been subverted: Public companies are still asked to disclose, yet capital is flooding into private companies with regulators’ blessing.

This Article provides a critique of the new public-private divide centered on its information effects. While regulators may have hoped for both the private and public …

One Size Does Not Fit All: A Contextual Approach To Fiduciary Duties Owed To Preferred Stockholders From Venture Capital To Public Preferred To Family Business, Juliet P. Kostritsky

Faculty Publications

This Article examines whether corporations should owe fiduciary duties to its preferred stockholders as preferred stockholders across all settings of preferred stock holding. In one context, sophisticated venture capitalists purchase preferred stock after carefully negotiating the stock price, control over the corporate governance, and other key stipulations by contract. Additionally, because the initial preferred stockholder could protect its interests through staged financing or board control, the preferred stockholder might not discount the stock even if it lacked protection since the other protective devices made the lack of such protections inconsequential so the initial holders won’t pay for these added fiduciary …

The Sec's Shift To Administrative Proceedings: An Empirical Assessment, Stephen J. Choi, Adam C. Prichard

Articles

Congress has repeatedly expanded the authority of the SEC to pursue violations of securities laws in proceedings adjudicated by the SEC's own administrative law judges, most recently through the Dodd-Frank Act. We report the results from an empirical study of SEC enforcement actions against non-financial public companies to assess the impact of the Dodd-Frank Act on the balance between civil court and administrative enforcement actions. We show a general decline in the number of court actions and an increase in the number of administrative proceedings post-Dodd-Frank. At the same time, we show an increase in average civil penalties post-Dodd-Frank for …

A Big Gap Between ‘Law In Books’ And ‘Law In Action’ And "A New Taxonomy Of Enforcement Strategies", Robin H. Huang, Nicholas C. Howson

Other Publications

Any attempt to comprehensively analyse the enforcement of corporate law and securities regulation is difficult, not only because there are so many distinct national systems in play, but also because, we need to examine both formal enforcement mechanisms and the way in which such mechanisms are applied in practice. If nothing else, the expert analyses presented in the foregoing chapters of this book confirm that with respect to enforcement issues a rather large gap does exist between what Roscoe Pound memorably called ‘law in books’ and ‘law in action’.

How Do Llc Owners Contract Around Default Statutory Protections?, Peter Molk

UF Law Faculty Publications

Limited liability companies are built on the idea of contractual freedom. Unlike other business organization forms, most owner protections apply only by default to LLCs, which are free to waive or modify them as desired. This freedom promises economic efficiency if parties are sophisticated but raises the potential for opportunism by relatively more sophisticated managers and majority owners. While companies ranging from small landscape firms to Chrysler and Fidelity organize as LLCs, remarkably little is known about whether or how LLCs use this contractual flexibility. I analyze the operating agreements of 283 privately owned LLCs organized under Delaware and New …

Carrot Or Stick? The Shift From Voluntary To Mandatory Disclosure Of Risk Factors, Karen K. Nelson, Adam C. Pritchard

Articles

This study investigates risk factor disclosures, examining both the voluntary, incentive-based disclosure regime provided by the safe harbor provision of the Private Securities Litigation Reform Act as well as the SEC's subsequent mandate of these disclosures. Firms subject to greater litigation risk disclose more risk factors, update the language more from year to year, and use more readable language than firms with lower litigation risk. These differences in the quality of disclosure are pronounced in the voluntary disclosure regime, but converge following the SEC mandate as low-risk firms improved the quality of their risk factor disclosures. Consistent with these findings, …

Sec Investigations And Securities Class Actions: An Empirical Comparison, Stephen J. Choi, Adam C. Pritchard

Articles

Using actions with both an SEC investigation and a class action as our baseline, we compare the targeting of SEC-only investigations with class-action-only lawsuits. Looking at measures of information asymmetry, we find that investors in the market perceive greater information asymmetry following the public announcement of the underlying violation for class-action-only lawsuits compared with SEC-only investigations. Turning to sanctions, we find that the incidence of top officer resignation is greater for class-action-only lawsuits relative to SEC-only investigations. Our findings are consistent with the private enforcement targeting disclosure violations at least as precisely as (if not more so than) SEC enforcement.

Economic Crisis And The Integration Of Law And Finance: The Impact Of Volatility Spikes, Edward G. Fox, Merritt B. Fox, Ronald J. Gilson

Articles

The 2008 financial crisis raised puzzles important for understanding how the capital market prices common stocks and in turn, for the intersection between law and finance. During the crisis, there was a dramatic five-fold spike, across all industries, in “idiosyncratic risk”—the volatility of individual-firm share prices after adjustment for movements in the market as a whole.

This phenomenon is not limited to the most recent financial crisis. This Article uses an empirical review to show that a dramatic spike in idiosyncratic risk has occurred with every major downturn from the 1920s through the recent financial crisis. It canvasses three possible …

Institutional Investors In Corporate Governance, Edward B. Rock

All Faculty Scholarship

This chapter of the Oxford Handbook on Corporate Law and Governance examines the role of institutional investors in corporate governance and the role of regulation in encouraging institutional investors to become active stewards. I approach these topics through asking what lessons we can draw from the U.S. experience for the E.U.’s 2014 proposed amendments to the Shareholder Rights Directive.

I begin by defining the institutional investor category, and summarizing the growth of institutional investors’ equity holdings over time. I then briefly survey how institutional investors themselves are governed and how they organize share voting. This leads me to two central …

Halliburton Ii: A Loser's History, Adam C. Pritchard

Articles

The Supreme Court was presented with an opportunity to bring fundamental reform to securities class actions last term in Halliburton Co. v. Erica P John Fund, Inc.. The Court ducked that opportunity, passing the buck to Congress to undo the mess that the Court had created a quarter century prior in Basic Inc. v. Levinson. Congress's history in dealing with securities class actions suggests that reform is unlikely to come from the legislature anytime soon. The Securities and Exchange Commission appears to be satisfied with the status quo as well. With these institutional actors resisting reform, corporations and …

The Mess At Morgan: Risk, Incentives And Shareholder Empowerment, Jill E. Fisch

All Faculty Scholarship

The financial crisis of 2008 focused increasing attention on corporate America and, in particular, the risk-taking behavior of large financial institutions. A growing appreciation of the “public” nature of the corporation resulted in a substantial number of high profile enforcement actions. In addition, demands for greater accountability led policymakers to attempt to harness the corporation’s internal decision-making structure, in the name of improved corporate governance, to further the interest of non-shareholder stakeholders. Dodd-Frank’s advisory vote on executive compensation is an example.

This essay argues that the effort to employ shareholders as agents of public values and, thereby, to inculcate corporate …

Reverse Cross-Listings - The Coming Race To List In Emerging Markets And An Enhanced Understanding Of Classical Bonding, Nicholas C. Howson, Vikramaditya Khanna

Articles

Studies have found that when a U.S. issuer lists abroad on a foreign exchange, its shares exhibit negative abnormal returns. This negative movement may be because the market expects that the foreign listing will facilitate undetectable insider trading on the foreign exchange or other conduct impermissible in the United States.

Bypassing Congress On Federal Debt: Executive Branch Options To Avoid Default, Steven L. Schwarcz

Faculty Scholarship

Even a “technical” default by the United States on its debt, such as a delay in paying principal or interest due to Congress’s failure to raise the federal debt ceiling, could have serious systemic consequences, destroying financial markets and undermining job creation, consumer spending, and economic growth. The ongoing political gamesmanship between Congress and the Executive Branch has been threatening — and even if temporarily resolved, almost certainly will continue to threaten — such a default. The various options discussed in the media for averting a default have not been legally and pragmatically viable. This article proposes new options for …

'Quack Corporate Governance' As Traditional Chinese Medicine – The Securities Regulation Cannibalization Of China's Corporate Law And A State Regulator's Battle Against Party State Political Economic Power, Nicholas C. Howson

Articles

From the start of the People’s Republic of China’s (PRC) “corporatization ” project in the late 1980s, a Chinese corporate governance regime subject to increasingly enabling legal norms has been determined by mandatory regulations imposed by the PRC securities regulator, the China Securities Regulatory Commission (CSRC). Indeed, the Chinese corporate law system has been cannibalized by all - encompassing securities regulation directed at corporate governance, at least for companies with listed stock. This Article traces the path of that sustained intervention and makes a case — wholly contrary to the “quack corporate governance” critique much aired in the United States …

Securities Law's Dirty Little Secret, Usha Rodrigues

Scholarly Works

Securities law’s dirty little secret is that rich investors have access to special kinds of investments—hedge funds, private equity, private companies—that everyone else does not. This disparity stems from the fact that, from its inception, federal securities law has jealously guarded the manner in which firms can sell shares to the general public. Perhaps paternalistically, the law assumes that the average investor needs the protection of the full panoply of securities regulation and thus should be limited to buying public securities. In contrast, accredited—i.e., wealthy— investors, who it is presumed can fend for themselves, have the luxury of choosing between …

Segmented Settlements Are Not The Answer: A Response To Professor Squire’S Article, How Collective Settlements Camouflage The Costs Of Shareholder Lawsuits, Christopher C. French

Journal Articles

In his recent article, Professor Richard Squire offers a provocative theory in which he claims the underlying claimants in shareholder litigation against corporate policyholders are overcompensated due to what he describes as “cramdown” settlements, under which insurers are forced to settle due to the “duty to contribute” that arises under multi-layered directors and officers (“D&O”) insurance programs. He also offers a novel idea regarding how this problem could be fixed by what he refers to as “segmented” settlements in which each insurer and the policyholder would be allowed to settle separately and consider only its own interests in doing so. …

Framing Address: A Framework For Analyzing Financial Market Transformation, Steven L. Schwarcz

Faculty Scholarship

To open an international conference on “Rethinking Financial Markets,” this address seeks to frame that inquiry from the perspectives of scholars in the fields of law, economics, finance, and accounting. In attempting to identify what it is about financial markets that is worth rethinking, the address focuses on market changes that increase decentralization, fragmentation, globalization, disintermediation, and funding mismatches. The address also argues that the scholarly perspectives are inherently interrelated: although scholars in each field proceed from their own toolkits, they all aim for the common normative goal of optimizing financial markets to enable capital formation.

Who Calls The Shots?: How Mutual Funds Vote On Director Elections, Stephen J. Choi, Jill E. Fisch, Marcel Kahan

All Faculty Scholarship

Shareholder voting has become an increasingly important focus of corporate governance, and mutual funds control a substantial percentage of shareholder voting power. The manner in which mutual funds exercise that power, however, is poorly understood. In particular, because neither mutual funds nor their advisors are beneficial owners of their portfolio holdings, there is concern that mutual fund voting may be uninformed or tainted by conflicts of interest. These concerns, if true, hamper the potential effectiveness of regulatory reforms such as proxy access and say on pay. This article analyzes mutual fund voting decisions in uncontested director elections. We find that …

Revisiting 'Truth In Securities Revisited': Abolishing Ipos And Harnessing Private Markets In The Public Good, Adam C. Pritchard

Articles

My thesis is that the transition between private- and public-company status could be less bumpy if we unify the public-private dividing line under the Securities Act and Exchange Act. The insight builds on Cohen's thought experiment where Congress first enacted the Exchange Act. My proposed public-private standard would take the company-registration model to its logical conclusion. The customary path to public-company status is through an IPO, typically with simultaneous listing of the shares on an exchange. There is nothing about public offerings, however, that makes them inherently antecedent to public-company status. What if companies became public, with required periodic disclosures …

Private Regulation Of Insider Trading In The Shadow Of Lax Public Enforcement: Evidence From Canadian Firms, Laura Nyantung Beny, Anita Anand

Articles

Like firms in the United States, many Canadian firms voluntarily restrict trading by corporate insiders beyond the requirements of insider trading laws (i.e., super-compliance). Thus, we aim to understand the determinants of firms’ private insider trading policies (ITPs), which are quasi-contractual devices. Based on the assumption that firms that face greater costs from insider trading (or greater benefits from restricting insider trading) ought to be more inclined than other firms to adopt more stringent ITPs, we develop several testable hypotheses. We test our hypotheses using data from a sample of firms included in the Toronto Stock Exchange/Standard and Poor’s (TSX/S&P) …

Shareholder Eugenics In The Public Corporation, Edward B. Rock

All Faculty Scholarship

In a world of active, empowered shareholders, the match between shareholders and public corporations can potentially affect firm value. This article examines the extent to which publicly held corporations can shape their shareholder base. Two sorts of approaches are available: direct/recruitment strategies; and shaping or socialization strategies. Direct/recruitment strategies through which “good” shareholders are attracted to the firm include: going public; targeted placement of shares; traditional investor relations; the exploitation of clientele effects; and de-recruitment. “Shaping” or “socialization” strategies in which shareholders of a “bad” or unknown type are transformed into shareholders of the “good” type include: choice of domicile; …