Law Commons^™

Eliminating Securities Fraud Class Actions Under The Radar, Barbara Black

Barbara Black

At least since Basic, Inc. v. Levinson, the business community and many influential scholars have challenged the existence of the securities fraud class action on a variety of grounds. Recently, two proposals have been advanced to “fix” the problem of “abusive” securities fraud class actions. One proposal requires arbitration of all securities fraud actions; the other eliminates the corporate defendant in most actions. Proponents assert that shareholders should have the right to adopt these proposals through amendment of the company’s certificate of incorporation. Both these proposals have attracted more than academic interest. In reality, adoption of either proposal would substantially …

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

Nadelle Grossman

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 in …

Do Independent Boards Behave Differently? Examining The Voluntary Adoption Of Board Monitoring Mechanisms, Anita I. Anand

Anita I Anand

We ask whether firms with an independent board of directors are more likely than firms without an independent board to adopt recommended corporate governance practices designed to enhance the board's monitoring capabilities. Using hand-collected data from Canadian firms listed on both American and Canadian stock exchanges, we find that firms with both types of boards voluntarily adopt corporate governance practices and that independent boards are no more likely to adopt these practices than their non-independent counterparts. One exception to this statement is the formation of board committees. When boards are independent, the audit and compensation committees are far more likely …

Effects Of Strategic Tax Behaviors On Corporate Governance, Nicola Sartori

Nicola Sartori

This paper addresses agency tensions and conflicts that may emerge between managers (agents) and shareholders (principals) as a result of aggressive tax planning strategies adopted by publicly held corporations. The interactions between corporate governance and taxation are bilateral and biunique: in fact, on one side, the manner in which corporate governance rules are structured affects the way a corporation fulfills its tax obligations; on the other side, the way tax designs (from the government perspective) and related tax strategies (from the corporation perspective) are planned influences corporate governance dynamics. This article investigates such bilateral relationship limiting the analysis to the …

Placebo Ethics, Usha Rodrigues, Mike Stegemoller

Usha Rodrigues

While there are innumerable theories on the best remedy for the current financial crisis, there is agreement on one point, at least: increased transparency is good. We look at a provision from the last round of financial regulation, the Sarbanes Oxley Act of 2002 (“SOX”), which imposed disclosure requirements tailored to prevent some of the kinds of abuses that led to the downfall of Enron. In response to Enron’s self-dealing transactions, Section 406 of SOX required a public company to disclose its code of ethics and to disclose immediately any waivers from that code the company grants to its top …

Macroeconomics & The Modern Corporation, Richard Shamos

Richard Shamos

This paper examines the intellectual basis of corporate law in order to develop a theory of the firm—metering theory—that is rooted in team production and institutional economics. This reconceptualization is distinct from the pure free market approach promoted by agency theory, which emphasizes the role of incentive effects on microeconomic actors. The main limitation of the agency analysis is its reliance on property law to analyze the modern corporation, which is instead driven by entity law. The crux of the economic analysis lies in the application of the macroeconomic model for the flow of goods and money in the economy …

The Legitimate Rights Of Public Shareholders, Lawrence E. Mitchell

Lawrence E. Mitchell

In recent years there has been significant ongoing academic debate over the expansion of public shareholders’ participation rights in corporate governance. The debate has accompanied a dramatic increase in institutional shareholder and hedge fund activism attempting to influence the conduct of corporate affairs.

The legitimacy of shareholder participation rights depends upon the actual role public shareholders play in contributing to the corporation’s function of providing goods and services and, ultimately, to economic growth and social welfare. Nobody in the debate has stopped to examine this question. This paper presents original empirical evidence that demonstrates that public shareholders do not, on …

The Legitimate Rights Of Public Shareholders, Lawrence E. Mitchell

Lawrence E. Mitchell

In recent years there has been significant ongoing academic debate over the expansion of public shareholders’ participation rights in corporate governance. The debate has accompanied a dramatic increase in institutional shareholder and hedge fund activism attempting to influence the conduct of corporate affairs.

The legitimacy of shareholder participation rights depends upon the actual role public shareholders play in contributing to the corporation’s function of providing goods and services and, ultimately, to economic growth and social welfare. Nobody in the debate has stopped to examine this question. This paper presents original empirical evidence that demonstrates that public shareholders do not, on …

What Will It Take To Label Participation In A Deceptive Scheme To Defraud Buyers Of Securities A Violation Of Section 10(B)? The Disastrous Result And Reasoning Of Stoneridge, Mark S. Klock

Mark S Klock

In 2008 the Supreme Court ruled in a 5 to 3 decision that participants to a sham transaction in the product market designed to fraudulently inflate revenue could not be liable in a private action to recover under Section 10(b) of the Securities and Exchange Act because the participants had not communicated directly with the shareholders and therefore the public could not have relied on the misrepresentations. Early commentary has been critical of the majority’s legal reasoning. I bring additional economic theory to the criticism of the majority in light of the subsequent financial sector and macroeconomic collapse and the …

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

Nadelle Grossman

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 in …

Deep Links: Does Knowledge Of The Law Change Managers’ Perceptions Of The Role Of Law And Ethics In Business?, Gavin Clarkson, Constance E. Bagley

Gavin Clarkson

Can knowledge of the law lead to a higher likelihood of ethical and legally compliant behavior? Our preliminary research suggests that it can. We surveyed 112 MBA students to determine the perception of law as well as to determine whether a course in law had any impact on their perceptions. Our findings suggest that knowledge of the law can prompt managers to become more legally compliant and more socially responsible. Deeper probing with the Zaltman Metaphor Elicitation Technique revealed three deep metaphors of the role of law in business: system, moral balance, and force. The results of both the quantitative …

Why Do Venture Capital Funds Burn Research And Development Deductions?”, Calvin H. Johnson

Calvin H. Johnson

Venture capital funds form a separate corporation for each venture they support. The separate incorporation destroys much of the value that the funds could achieve from deducting f research and development costs incurred by the ventures. The resulting taxes are draconian, sometimes confiscatory. The article looks carefully at the justifications offered for chosen structures in the literature and by interviews of experts in the field, and concludes that none of the justifications work. The willingness of sophisticated funds to burn their R&D deductions is a serious anomaly. The continuing puzzle as to why the deduction-destroying structure is used makes it …

The Legitimate Rights Of Public Shareholders, Lawrence E. Mitchell

Lawrence E. Mitchell

In recent years there has been significant ongoing academic debate over the expansion of public shareholders’ participation rights in corporate governance. The debate has accompanied a dramatic increase in institutional shareholder and hedge fund activism attempting to influence the conduct of corporate affairs.

The legitimacy of shareholder participation rights depends upon the actual role public shareholders play in contributing to the corporation’s function of providing goods and services and, ultimately, to economic growth and social welfare. Nobody in the debate has stopped to examine this question. This paper presents original empirical evidence that demonstrates that public shareholders do not, on …

The Nanny Corporation And The Market For Altruism, Todd Henderson

Todd Henderson

Individuals in common pools-employees in firms, shareholders in firms, individuals in insurance plans, and citizens in a jurisdiction-want the managers of those common pools to act paternalistically toward other individuals, because this lowers the costs of being in the pool. The nanny state, which bans smoking in public places and imposes innumerable sin taxes, and the nanny corporation, which is starting to force employees to be more healthy, are simply responding to this demand. These two can thought of as competing in the "market for paternalism" to deliver paternalism to individuals that demand it.

Where nannyism is inevitable, as it …

Star Creation: The Manipulation Of Mutual Fund Performance Through Incubation, Ahmed E. Taha, Alan R. Palmiter

Ahmed E Taha

This article reveals how mutual fund companies mislead investors by marketing new funds with artificially high returns. Fund companies create a number of small, new funds (“incubator funds”) that initially operate out of public view. After a period of incubation, the strong performers are actively marketed to the public while the weak performers are quietly terminated. By highlighting the successful incubator funds and hiding the unsuccessful ones, funds companies create the illusion that that the successful funds’ returns were the result of skill rather than luck. In addition, fund companies often subsidize their incubator funds to further artificially boost their …

Cooperation With Securities Fraud, Ronald J. Colombo

Ronald J Colombo

Secondary actors, such as lawyers, accountants, and bankers, are oftentimes critical players in securities fraud. The important question of their liability to private plaintiffs has been, and remains, one of considerable confusion. In Stoneridge Inv. Partners LLC v. Scientific-Atlanta, Inc., the U.S. Supreme Court could have, but failed to, dispel some of this confusion.

Contrary to the common understanding, Stoneridge did not foreclose liability on the part of secondary actors who manage to remain anonymous participants in securities fraud. Read carefully, Stoneridge instead held that proximity to fraud should drive the liability determination.

Although "proximity" is itself an indefinite concept, …

Certified Trouble Ahead For Activist Shareholders?: The Sec, Delaware Certification & Shareholder Bylaw Proposals After Ca, Inc. V. Afscme Employees Pension Plan, Matthew F. Sullivan

Matthew F Sullivan

The relationship between shareholders’ power to adopt bylaws and the board of director’s power to manage the business and affairs of the corporation has been an unsettled, and contentious, issue. The Supreme Court of Delaware, in CA, Inc. v. AFSCME Employees Pension Plan, directly addressed this issue and established a framework for examining proposed shareholder bylaws. The case arose through the first use of the newly amended certification procedure that permits the SEC to certify questions to the Supreme Court of Delaware for resolution. AFSCME submitted a bylaw for inclusion in CA’s 2008 proxy materials that would require CA to …

Who's Afraid Of Shareholder Power? A Comparative Law Perspective, Jennifer Hill

Jennifer Hill Professor

Who's Afraid of Shareholder Power? A Comparative Law Perspective JENNIFER G. HILL University of Sydney – Faculty of Law; Visiting Professor, Vanderbilt University – School of Law; Research Associate – European Corporate Governance Institute (ECGI) Abstract Shareholder power is back on the regulatory agenda. Although shareholders have traditionally had restricted participatory rights under US corporate law, this paradigm has been challenged in recent times. The shareholder empowerment debate and the Paulson Committee report both raise shareholder power as a serious subject for corporate law reform. Yet, in spite of calls for stronger shareholder rights, there has been great resistance to …

Who’S Afraid Of Shareholder Power? A Comparative Law Perspective, Jennifer Hill

Jennifer Hill Professor

Who's Afraid of Shareholder Power? A Comparative Law Perspective JENNIFER G. HILL University of Sydney – Faculty of Law; Visiting Professor, Vanderbilt University – School of Law; Research Associate – European Corporate Governance Institute (ECGI) Abstract Shareholder power is back on the regulatory agenda. Although shareholders have traditionally had restricted participatory rights under US corporate law, this paradigm has been challenged in recent times. The shareholder empowerment debate and the Paulson Committee report both raise shareholder power as a serious subject for corporate law reform. Yet, in spite of calls for stronger shareholder rights, there has been great resistance to …

Subverting Shareholder Rights: Lessons From News Corp's Migration To Delaware, Jennifer Hill

Jennifer Hill Professor

Subverting Shareholder Rights: Lessons from News Corp's Migration to Delaware JENNIFER G. HILL University of Sydney – Faculty of Law; Visiting Professor, Vanderbilt University – School of Law; Research Associate – European Corporate Governance Institute (ECGI) Abstract This article critically analyzes News Corp’s re-incorporation in Delaware against the backdrop of two major contemporary corporate governance debates, relating to shareholder empowerment and convergence theory. Legal scholars opposing greater shareholder power often argue that the lack of shareholder participatory rights under US law provides evidence that such rights are neither desired nor valued by investors. Also, an underlying assumption of convergence theory …

Broken Principle: Solving The Corporate Privilege Waiver Dilemma, Don R. Berthiaume

Don R Berthiaume

How can corporations cooperate in white collar criminal investigations by providing “just the facts” without waiving the attorney client privilege and work product protection? This article provides a unique solution to this vexing problem. This article argues that Rule 30(b)(6) of the Federal Rules of Civil Procedure, which allows civil litigants to issue a subpoena to an organization and cause them to “designate one or more officers, directors, or managing agents, or designate other persons who consent to testify on its behalf... about information known or reasonably available to the organization,” provides a template for the creation of a similar …

Subverting Shareholder Rights: Lessons From News Corp's Migration To Delaware, Jennifer Hill

Jennifer Hill Professor

Subverting Shareholder Rights: Lessons from News Corp's Migration to Delaware JENNIFER G. HILL University of Sydney – Faculty of Law; Visiting Professor, Vanderbilt University – School of Law; Research Associate – European Corporate Governance Institute (ECGI) Abstract This article critically analyzes News Corp’s re-incorporation in Delaware against the backdrop of two major contemporary corporate governance debates, relating to shareholder empowerment and convergence theory. Legal scholars opposing greater shareholder power often argue that the lack of shareholder participatory rights under US law provides evidence that such rights are neither desired nor valued by investors. Also, an underlying assumption of convergence theory …

Subverting Shareholder Rights: Lessons From News Corp's Migration To Delaware, Jennifer Hill

Jennifer Hill Professor

Subverting Shareholder Rights: Lessons from News Corp's Migration to Delaware JENNIFER G. HILL University of Sydney – Faculty of Law; Visiting Professor, Vanderbilt University – School of Law; Research Associate – European Corporate Governance Institute (ECGI) Abstract This article critically analyzes News Corp’s re-incorporation in Delaware against the backdrop of two major contemporary corporate governance debates, relating to shareholder empowerment and convergence theory. Legal scholars opposing greater shareholder power often argue that the lack of shareholder participatory rights under US law provides evidence that such rights are neither desired nor valued by investors. Also, an underlying assumption of convergence theory …

Complexity As A Catalyst Of Market Failure, Steven L. Schwarcz

Steven L Schwarcz

This article examines how the complexities of modern financial markets and investment securities can trigger market failure. The article also analyzes what steps, including possible regulation, should be taken to reduce the potential for failure. Because market complexities and failures are characteristic of complexities and failures in engineering systems with nonlinear feedback, the analysis draws on the literature analyzing those systems.

The Market For Securities And Its Regulation Through Gatekeepers, Carsten J. Gerner-Beuerle

Carsten J Gerner-Beuerle

The financial scandals of the last decade have called into question the effectiveness of the system of securities regulation in many countries. Articles that have examined the origins of the regulatory crisis have concluded that the classical tools of corporate governance for the supervision of management have lost their force in light of new incentive structures in the financial markets. They see as the solution to the regulatory lacunae the utilisation of financial intermediaries and other market participants as gatekeepers, i.e. as agents that ensure compliance of the primary market actor (the issuer) with applicable rules by reviewing its disclosures …

Freedom Or Legal Restriction On Company Chart--Current Assessment And Suggestion For Improvements In The Prc Context, Liying Tan

Liying Tan

Abstract: With the economic reform underway for nearly 30 years and Chinese company law adopted for 14 years, it is an appropriate time to review and critically examine the current company Articles of association state of running in China to determine if there is a need for reform or improvement. Legislations respecting of Articles of association always help to enhance competition circumstance for companies. And greater competition of market would help to resolve the problem of ownership confusion in China where the capital markets are still underdeveloped and market competition is weak. Though company law of China is practically new, …

Fees On Fees In New York - Corporate Agents Beware, George Klidonas

George Klidonas

It is well settled law in New York that corporate officers and directors shall be indemnified for suits brought against them as agents of the corporation. The only limitation is that they are successful on the merits of the case and the corporate agent did not engage in conduct pursuant to bad faith. But what happens when that agent asks the corporation to indemnify them and the corporation refuses? According to a recent Court of Appeals case, if that agent files a subsequent indemnification suit, the agent is not entitled to legal fees for costs arising out of the subsequent …

Choice Of Forum In Securities Litigation: Confronting The Aftermath Of Congressional Reform Of The Securities Act Of 1933, Matthew O'Brien

Matthew O'Brien

The article addresses the wave of federal legislative reform since the mid-1990s aimed at reducing forum shopping by plaintiffs in securities class actions. In particular, the article examines the direct conflict between section 22(a) of the Securities Act of 1933 (“1933 Act”), which prohibits defendants from removing 1933 Act cases from state court to federal court, and the Class Action Fairness Act of 2005 (“CAFA”), which permits removal of high-dollar class actions involving diverse parties.

The article shows how this statutory conflict has produced a recent split between the Seventh and Ninth Circuit Courts of Appeals. In July 2008, the …

Detrimental Legal Implications Of Off-Balance Sheet Special Purpose Vehicles In Light Of Implicit Guarantees, Tyson E. Taylor

Tyson E Taylor

In the face of financial institutions’ spiraling asset prices, large write-offs, and excessive risk exposure firms are being forced to guarantee their SPVs and VIEs. In light of current accounting standards, financial firms’ efforts to preserve their institutional reputation by maintaining implicit guarantees on off-balance sheet SPVs have rendered the SPV moot as a viable vehicle of off-balance sheet asset transfers. The fundamental problem with these implicit guarantees is that they appear to violate the “true sale” element of the ABS process under FAS 140 and cause the sponsor to be designated a “primary beneficiary” under FIN 46(R). Under FAS …

The Nyse Response To Specialist Misconduct: An Example Of The Failure Of Self-Regulation, Nan S. Ellis, Lisa M. Fairchild, Harold D. Fletcher

Nan S Ellis

Public attention has been focused on the financial services industry in the wake of questionable lending practices in the mortgage market, the demise of traditional investment banks and the failure of large commercial banks. We argue in this article that part of the wide-sweeping reform that is likely to result from the current financial crisis should include a reform of NYSE regulation. The NYSE is currently a self-regulatory organization (SRO). This paper examines the scandal involving specialist misconduct that occurred in 2003 and the NYSE response to that scandal. We argue that NYSE inattention contributed to the occurrence of misconduct …