Law Commons^™

Deal Protection Devices, Albert H. Choi

Articles

In mergers and acquisitions transactions, a buyer and a seller will often agree to contractual mechanisms (deal protection devices) to deter third parties from jumping the deal and to compensate a disappointed buyer. With the help of auction theory, this Article analyzes various deal protection devices, while focusing on the two most commonly used mechanisms: match rights and target termination fees. A match right gives the buyer a right to “match” a third party’s offer so as to prevent the third party from snatching the target away, while a termination fee compensates the buyer when a third party acquires the …

The Separation Of Voting And Control: The Role Of Contract In Corporate Governance, Gabriel V. Rauterberg

Articles

The default rules of corporate law make shareholders’ control rights a function of their voting power. Whether a director is elected or a merger is approved depends on how shareholders vote. Yet, in private corporations shareholders routinely alter their rights by contract. This phenomenon of shareholder agreements—contracts among the owners of a firm— has received far less attention than it deserves, mainly because detailed data about the actual contents of shareholder agreements has been lacking. Private companies disclose little, and shareholder agreements are thought to play a trivial or nonexistent role in public companies. I show that this is false—fifteen …

Is There A Delaware Effect For Controlled Firms?, Edward Fox

Articles

The impact of Delaware incorporation on firm value remains a central question in corporate law. Despite the difficulty scholars have had in agreeing on an answer to this question, there is a consensus that Delaware has long enjoyed stable and important advantages in the expertise of its judiciary and its extensive case law. These advantages are believed to be particularly important for firms with a controlling shareholder. This Article attempts to empirically measure the effect of Delaware incorporation on these controlled firms and thus helps us understand the market value of Delaware’s judiciary and case law. It finds, surprisingly, that …

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 …

Golden Parachutes And The Limits Of Shareholder Voting, Albert H. Choi, Andrew C.W. Lund, Robert Schonlau

Articles

With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, Congress attempted to constrain change-in-control payments (also known as “golden parachutes”) by giving shareholders the right to approve or disapprove such payments on an advisory basis. This Essay is the first to empirically examine the experience with the Say-on-Golden-Parachute (“SOGP”) vote. We find that unlike shareholder votes on proposed mergers, there is a significant amount of variation with respect to votes on golden parachutes. Notwithstanding the variation, however, the SOGP voting regime is likely ineffective in controlling golden parachute (“GP”) compensation. First, proxy advisors seem …

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 …

Corporate Governance, Capital Markets, And Securities Law, Adam C. Pritchard

Book Chapters

This chapter explores the dividing line between corporate governance and securities law from both historical and institutional perspectives. Section 2 examines the origins of the dividing line between securities law and corporate governance in the United States, as well as the efforts of the SEC to push against that boundary. That history sets the stage for section 3, which broadens the inquiry by examining the institutional connections between capital markets and corporate governance. Are there practical limits to the connection between securities law and corporate governance? The US again illustrates the point, as Congress has increasingly crossed the traditional boundary …

Piling On? An Empirical Study Of Parallel Derivative Suits, Stephen J. Choi, Jessica Erickson, Adam C. Pritchard

Articles

Using a sample of all companies named as defendants in securities class actions between July 1, 2005 and December 31, 2008, we study parallel suits relying on state corporate law arising out of the same allegations as the securities class actions. We test several ways that parallel suits may add value to a securities class action. Most parallel suits target cases involving obvious indicia of wrongdoing. Moreover, we find that although a modest percentage of parallel suits are filed first, over 80 percent are filed after a securities class action (termed “follow-on” parallel suits). We find that parallel suits and, …

China's 'Corporatization Without Privatization' And The Late 19th Century Roots Of A Stubborn Path Dependency, Nicholas Howson

Articles

This Article analyzes the contemporary program of “corporatization without privatization” in the People's Republic of China (PRC) directed at China's traditional state-owned enterprises (SOEs) through a consideration of long ago precursor enterprise establishments--starting from the last Chinese imperial dynasty's creation of “government-promoted/-supervised, merchant-financed/-operated” (guandu shangban) firms in the latter part of the nineteenth century. While analysts are tempted to see the PRC corporations with listings on international exchanges that dominate the global economy and capital markets as expressions of “convergence,” this Article argues that such firms in fact show deeply embedded aspects of path dependency unique to the Chinese context …

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 Fallacious Objections To The Tax Treatment Of Carried Interest, Douglas A. Kahn, Jeffrey H. Kahn

Articles

“The tax treatment of carried interest has become a notorious bete noire for many politicians and some academicians and practitioners. Both 2016 presidential candidates denounced the current tax treatment and vowed to change it. President Obama described the current treatment as a "tax loophole" which should be closed. Others have also characterized the current tax treatment as an abusive loophole.' It is the thesis of this article that those criticisms are unfounded. To the contrary, the current tax treatment accords with sound tax policy and is proper and appropriate. Given the broad approval that attended the attacks on carried interest, …

Contracting Out Of The Fiduciary Duty Of Loyalty: An Empirical Analysis Of Corporate Opportunity Waivers, Gabriel Rauterberg, Eric Talley

Articles

For centuries, the duty of loyalty has been the hallowed centerpiece of fiduciary obligation, widely considered one of the few “mandatory” rules of corporate law. That view, however, is no longer true. Beginning in 2000, Delaware dramatically departed from tradition by granting incorporated entities a statutory right to waive a crucial part of the duty of loyalty: the corporate opportunities doctrine. Other states have since followed Delaware’s lead, similarly permitting firms to execute “corporate opportunity waivers.” Surprisingly, more than fifteen years into this reform experiment, no study has attempted to either systematically measure the corporate response to these reforms or …

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’.

Preface, Robin H. Huang, Nicholas C. Howson

Book Chapters

This volume collects the fruits of an unprecedented international academic conference, ‘Public and Private Enforcement of Company Law and Securities Regulation – China and the World’, which was held at the Chinese University of Hong Kong (CUHK) in December 2014 and convened by the Centre for Financial Regulation and Economic Development (CFRED) of the Faculty of Law of CUHK, the University of Michigan Law School and the Lieberthal Rogel Center for Chinese Studies at the University of Michigan. The aim of the conference was to gather, in one place and at one time, some of the world’s top academic specialists, …

Tax Treatment Of A Marijuana Business, Douglas A. Kahn, Howard Bromberg

Articles

Currently, twenty-eight states and the District of Columbia allow the use of marijuana for medical purposes and permit the conduct of a business marketing of marijuana for that purpose. Eight of those states and the District of Columbia permit the recreational use of marijuana. There is reason to believe that more states will decriminalize the marketing of marijuana. However, marijuana is listed in Schedule 1 of the federal Controlled Substances Act of 1970 (CSA) which makes it illegal under federal law to manufacture or distribute marijuana even when it is legal to do so under local state law. In a …

Multinational Firms And Tax Havens, Anna Gumpert, James R. Hines Jr., Monika Schnitzer

Articles

Multinational firms with operations in high-tax countries can benefit the most from reallocating taxable income to tax havens, though this is sufficiently difficult and costly that only 20.4% of German multinational firms have any tax haven affiliates. Among German manufacturing firms, a 1 percentage point higher foreign tax rate is associated with a 2.3% greater likelihood of owning a tax haven affiliate. This is consistent with tax avoidance incentives and contrasts with earlier evidence for U.S. firms. The relationship is less strong for firms in service industries, possibly reflecting the difficulty of reallocating taxable service income.

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, …

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 …

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.

Full Circle? The Single Tax Principle, Beps, And The New Us Model, Reuven S. Avi-Yonah

Articles

This paper will argue that while there is some innovation in BEPS, it is in fact more of a continuation that a sharp break with the past. Like Alexis de Tocqueville’s French Revolution, BEPS represents both continuity and change. In particular, the single tax principle has formed the theoretical basis of much of the international tax regime from the beginning. And it is in fact this continuity rather than any sharp change that gives the final BEPS package its promise to, as Secretary General Gurria also promised, “put an end to double non-taxation.”

Provisions Denying A Deduction For Illegal Expenses And Expenses Of An Illegal Business Should Be Repealed, Douglas A. Kahn, Howard Bromberg

Articles

Currently, the tax law denies a deduction for business expenses that violate a federal or state law (but only if the state law is generally enforced). In addition, losses, including business losses, cannot be deducted if they arise out of an illegal activity. For example, medical expenses are denied a deduction if they are illegal. Kickbacks, bribes, and rebates given in connection with the Medicaid or Medicare program are nondeductible. Any expenses, legal or not, incurred in connection with the conduct of a business of selling a controlled substance that is prohibited by federal law (or by the law of …

The Pendulum Swings: Reconsidering Corporate Criminal Prosecution, David M. Uhlmann

Articles

Corporate crime continues to occur at an alarming rate, yet disagreement persists among scholars and practitioners about the role of corporate criminal prosecution. Some argue that corporations should face criminal prosecution for their misconduct, while others would reserve criminal prosecution for individual corporate officials. Perhaps as a result of this conflict, there has been a dramatic increase over the last decade in the use of deferred prosecution and non-prosecution agreements for some corporate crimes, even as the government continues to bring criminal charges for other corporate crimes. To move beyond our erratic approach to corporate crime, we need a better …

The Three Causes Of Inversions: Reflections On Pfizer/Allergan And Notice 2015-79, Reuven S. Avi-Yonah

Law & Economics Working Papers

On November 19, 2015, Treasury released Notice 2015-79 (the “Notice”). The Notice represents Treasury’s most recent response to the second wave of inversions, i.e., transactions in which US corporations become subsidiaries of foreign corporations without a meaningful change in their underlying business or in the location of their corporate headquarters. It follows on the heels of the announcement that Pfizer Inc. is considering a merger with Allergan PLC, an inverted Irish company, and supplements Notice 2014-52 from September 2014. Unfortunately, just like Notice 2014-52, the Notice is unlikely to stem the tide, and is even unlikely to stop Pfizer/Allergan. For …

Protecting The State From Itself? Regulatory Interventions In Corporate Governance And The Financing Of China's 'State Capitalism', Nicholas C, Howson

Book Chapters

From the start of China’s “corporatization without privatization” process in the late 1980s, a Chinese corporate governance regime, apparently shareholder-empowering and determined by enabling legal norms, has been altered by mandatory governance mechanisms imposed by a state administrative agency, the China Securities Regulatory Commission (CSRC). This has been done to protect minority shareholders against exploitation by the Party-state controlling shareholders, the power behind China’s “state capitalism.” This chapter reviews the path of this benign intervention by the CSRC and the structural reasons for it, and then speculates on why this novel example of the China’s “fragmented authoritarianism” continues to be …

The Institutional Appetite For Quack Corporate Governance, Alicia J. Davis

Articles

This Article offers evidence that higher quality internal corporate governance is associated with higher levels of ownership by institutional investors. This finding is consistent with the idea that institutions have greater reason than individual investors to prefer well-governed firms, but surprising given the substantial empirical evidence that casts doubt on the efficacy of internal governance mechanisms. The study described in this Article also finds that higher quality external governance is associated with lower proportions of ownership by certain types of institutional investors, also a somewhat surprising result given available empirical evidence on the positive relationship between external governance and firm …

Think Like A Businessperson: Using Business School Cases To Create Strategic Corporate Lawyers​., Alicia J. Davis

Articles

For the past twenty-five years, my academic and professional pursuits have straddled the line between business and law. I majored in business administration in college and then worked as an analyst in the Corporate Finance department at a bulge bracket Wall Street firm. After completing a JD/MBA, I returned to investment banking with a focus on middle-market mergers and acquisitions (M&A) and subsequently practiced law with a focus on private equity and M&A. Finally, in 2004, I found my current home as a corporate law professor. In my courses, which include Mergers & Acquisitions, Enterprise Organization, and Investor Protection, I …

Minority And Women Entrepreneurs: Building Capital, Networks, And Skills, Michael S. Barr

Other Publications

The United States has an enviable entrepreneurial culture and a track record of building new companies. Yet new and small business owners often face particular challenges, including lack of access to capital, insufficient business networks for peer support, investment, and business opportunities, and the absence of the full range of essential skills necessary to lead a business to survive and grow. Women and minority entrepreneurs often face even greater obstacles. While business formation is, of course, primarily a matter for the private sector, public policy can and should encourage increased rates of entrepreneurship, and the capital, networks, and skills essential …

企業の社会的責任と戦略的租税行動 [Corporate Social Responsibility And Strategic Tax Behavior], Reuven S. Avi-Yonah, Keisaku Koga Translator

Articles

This paper addresses two questions. First, from the perspective of the corporation, should the corporation cooperate and pay the corporate tax, or should it engage in "strategic" tax behavior designed to minimize or eliminate its corporate tax burden? Second, from the perspective of the state, should the state use the corporate tax just to raise revenue, or should it also try to use it as a regulatory tool to steer corporate behavior in directions that it deems beneficial to society? The paper argues that whatever our view of the nature of the corporation and of the legitimacy of corporate social …

Cancellation Of Debt And Related Transactions, Douglas A. Kahn, Jeffrey H. Kahn

Articles

If a taxpayer borrows money, the borrowed funds are not included in the taxpayer's gross income. That treatment is proper even though the taxpayer has increased his assets by the amount he borrowed because he also has created a corresponding liability to pay back the loan. The taxpayer's net: wealth has not increased. 'The more difficult and interesting questions arise when the taxpayer fails to repay the loan. At first blush, it would appear that upon cancellation of a loan, the taxpayer should have income for the amount that was cancelled. However, the current tax treatment is not that simple. …

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

Law & Economics Working Papers

This paper examines the implications for the traditional "legal bonding" hypothesis arising from future "reverse" cross-listings, meaning the cross-listing by issuers from jurisdictions with stronger investor protections into capital markets and on exchanges where investor protections are deemed less robust. We use as examples the first "Indian Depositary Receipt" or IDR IPO in May 2010, and IPOs we believe will complete on a future Shanghai Stock Exchange "international board". This analysis serves to dilute one of the long-standing negative implications of the traditional legal bonding account -- that reverse cross-listings by issuers from jurisdictions with stronger investor protections into weaker …