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Full-Text Articles in Law

Giving Shareholders The Right To Say No, Albert H. Choi, Adam C. Pritchard Jan 2023

Giving Shareholders The Right To Say No, Albert H. Choi, Adam C. Pritchard

Articles

When a public company releases misleading information that distorts the market for the company’s stock, investors who purchase at the inflated price lose money when (and if) the misleading information is later corrected. Under Rule 10b‑5 of the Securities Exchange Act of 1934, investors can seek compensation from corporations and their officers who make materially misleading statements that the investors relied on when buying or selling a security. Compensation is the obvious goal, but the threat of lawsuits can also benefit investors by deterring managers from committing fraud.


Just Say No? Shareholder Voting On Securities Class Actions, Albert H. Choi, Stephen J. Choi, Adam C. Pritchard Oct 2022

Just Say No? Shareholder Voting On Securities Class Actions, Albert H. Choi, Stephen J. Choi, Adam C. Pritchard

Articles

The U.S. securities laws allow security-holders to bring a class action suit against a public company and its officers who make materially misleading statements to the market. The class action mechanism allows individual claimants to aggregate their claims. This procedure mitigates the collective action problem among claimants, and also creates potential economies of scale. Despite these efficiencies, the class action mechanism has been criticized for being driven by attorneys and also encouraging nuisance suits. Although various statutory and doctrinal solutions have been proposed and implemented over the years, the concerns over the agency problem and nuisance suits persist. This paper …


Initial Public Offering And Optimal Corporate Governance, Albert H. Choi Feb 2022

Initial Public Offering And Optimal Corporate Governance, Albert H. Choi

Law & Economics Working Papers

This paper examines the long-standing debate over whether firms have a market-based incentive to adopt optimal governance provisions at their initial public offering (IPO). Various scholars and practitioners have argued that firms that offer stock to the public with suboptimal governance structure will be penalized by the market through a lower IPO price. At the same time, others have documented empirical evidence that many IPO firms have putatively suboptimal governance provisions, such as anti-takeover provisions and dual class structure, and many, especially those with dual-class structure, enjoy a market premium at their IPO. This paper attempts to bridge this gap. …


The New Public/Private Equilibrium And The Regulation Of Public Companies, Elisabeth De Fontenay, Gabriel V. Rauterberg Jan 2022

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

Law & Economics Working Papers

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 …


The Future Of Securities Law In The Supreme Court, Adam C. Pritchard, Robert B. Thompson Aug 2021

The Future Of Securities Law In The Supreme Court, Adam C. Pritchard, Robert B. Thompson

Articles

Since the enactment of the first federal securities statute in 1933, securities law has illustrated key shifts in the Supreme Court’s jurisprudence. During the New Deal, the Court’s securities law decisions shifted almost overnight from open hostility toward the newly-expanded administrative state to broad deference to agency expertise. In the 1940s, securities cases helped build the legal foundation for a broadly enabling administrative law. The 1960s saw the Warren Court creating new implied rights of action in securities law illustrative of the Court’s approach to statutes generally. The stage seemed set for the rise of “federal corporate law.” The Court …


The New Public/Private Equilibrium And The Regulation Of Public Companies, Elisabeth De Fontenay, Gabriel Rauterberg Jan 2021

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

Articles

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 …


Federal Forum Provisions And The Internal Affairs Doctrine, Dhruv Aggarwal, Albert H. Choi Aug 2020

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

Law & Economics Working Papers

A key question at the intersection of state and federal law is whether corporations 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 Securities Act of 1933 (“1933 Act”). The decision held that the internal affairs doctrine, which is the bedrock of U.S. corporate law, does not permit charter and bylaw provisions …


Federal Forum Provisions And The Internal Affairs Doctrine, Dhruv Aggarwal, Albert H. Choi, Ofer Eldar Aug 2020

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 …


Strengthening The Passivity Default, Ian Ayres, Edward Fox Jun 2019

Strengthening The Passivity Default, Ian Ayres, Edward Fox

Articles

In The Prudence of Passivity, Bryon Harmon and Laura Fisher (hereafter HF) argue that "passive management become the default approach for the investment of trust funds, to be abandoned only when circumstances specifically dictate the use of active management."' In this comment we argue that their thesis could be strengthened (i) by more clearly distinguishing between default law and default investment practices, (ii) by more clearly articulating their favored altering rules.


Alpha Duties: The Search For Excess Returns And Appropriate Fiduciary Duties, Ian Ayres, Edward Fox Mar 2019

Alpha Duties: The Search For Excess Returns And Appropriate Fiduciary Duties, Ian Ayres, Edward Fox

Articles

Modern finance theory and investment practice have shifted toward “passive investing.” The current consensus is that most savers should invest in mutual funds or ETFs that are (i) well-diversified, (ii) low-cost, and (iii) expose their portfolios to age-appropriate stock market risk. The law governing trustees, investment advisers, broker–dealers, 401(k) plan managers, and other investment fiduciaries has evolved to push them gently toward this consensus. But these laws still provide broad scope for fiduciaries to recommend that clients invest instead in specific assets that they believe will produce “alpha” by outperforming the market. Seeking alpha comes at a cost, however, in …


Securities Law In The Sixties: The Supreme Court, The Second Circuit, And The Triumph Of Purpose Over Text, Adam C. Pritchard, Robert B. Thompson Nov 2018

Securities Law In The Sixties: The Supreme Court, The Second Circuit, And The Triumph Of Purpose Over Text, Adam C. Pritchard, Robert B. Thompson

Articles

This Article analyzes the Supreme Court’s leading securities cases from 1962 to 1972—SEC v. Capital Gains Research Bureau, Inc.; J.I. Case Co. v. Borak; Mills v. Electric Auto-Lite Co.; Superintendent of Insurance v. Bankers Life & Casualty Co.; and Affiliated Ute of Utah v. United States—relying not just on the published opinions, but also the Justices’ internal letters, memos, and conference notes. The Sixties Court did not simply apply the text as enacted by Congress, but instead invoked the securities laws’ purposes as a guide to interpretation. The Court became a partner of Congress in shaping the securities laws, rather …


Texas Gulf Sulphur And The Genesis Of Corporate Liability Under Rule 10b-5, Adam C. Pritchard, Robert B. Thompson Oct 2018

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 …


Informed Trading And Its Regulation, Merritt B. Fox, Lawrence R. Glosten, Gabriel V. Rauterberg Jun 2018

Informed Trading And Its Regulation, Merritt B. Fox, Lawrence R. Glosten, Gabriel V. Rauterberg

Articles

Informed trading--trading on information not yet reflected in a stock's price-- drives the stock market. Such informational advantages can arise from astute analysis of varied pieces of public news, from just released public information, or from confidential information from inside a firm. We argue that these disparate types of trading are all better regulated as part of the broader phenomenon of informed trading. Informed trading makes share prices more accurate, enhancing the allocation of capital, but also makes markets less liquid, which is costly to the efficiency of trade. Informed trading thus poses a fundamental trade-off in how it affects …


High‐Frequency Trading And The New Stock Market: Sense And Nonsense, Merritt B. Fox, Lawrence R. Glosten, Gabriel V. Rauterberg Feb 2018

High‐Frequency Trading And The New Stock Market: Sense And Nonsense, Merritt B. Fox, Lawrence R. Glosten, Gabriel V. Rauterberg

Articles

The stock market has been transformed during the last 25 years. Human suppliers of liquidity like the NASDAQ dealers and NYSE specialists have been replaced by algorithmic market making; stocks that once traded on a single venue now trade across twelve exchanges and a multitude of alternative trading systems. New venues like dark pools, and new participants like high‐frequency traders, have emerged to take on prominent roles. This new market has had more than its share of controversy and regulatory scrutiny, particularly in the wake of Michael Lewis’s bestseller Flash Boys. In this article, the authors analyze five of the …


The Regulation Of Trading Markets: A Survey And Evaluation, Paul G. Mahoney, Gabriel V. Rauterberg Jan 2018

The Regulation Of Trading Markets: A Survey And Evaluation, Paul G. Mahoney, Gabriel V. Rauterberg

Book Chapters

This chapter was prepared for a conference exploring the desirability and structure of a new special study of the securities markets. Our objective is not to resolve all of the questions that commentators have raised about the new equity markets, but to lay the groundwork for a new special study by surveying the state of market regulation, identifying issues, and offering preliminary evaluations.


Corporate Governance, Capital Markets, And Securities Law, Adam C. Pritchard Jan 2018

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 …


Stock Market Manipulation And Its Regulation, Merritt B. Fox, Lawrence R. Glosten, Gabriel Rauterberg Jan 2018

Stock Market Manipulation And Its Regulation, Merritt B. Fox, Lawrence R. Glosten, Gabriel Rauterberg

Articles

More than eighty years after federal law first addressed stock market manipulation, the federal courts remain fractured by disagreement and confusion concerning manipulation law's most foundational issues. There remains, for example, a sharp split among the federal circuits concerning manipulation law's central question: Whether trading activity alone can ever be considered illegal manipulation under federal law? Academics have been similarly confused-economists and legal scholars cannot agree on whether manipulation is even possible in principle, let alone on how to properly address it in practice.


Piling On? An Empirical Study Of Parallel Derivative Suits, Stephen J. Choi, Jessica Erickson, Adam C. Pritchard Nov 2017

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, …


Enforcement Of Corporate And Securities Laws In India: The Arrival Of The Class Action?, Vikramaditya S. Khanna Sep 2017

Enforcement Of Corporate And Securities Laws In India: The Arrival Of The Class Action?, Vikramaditya S. Khanna

Book Chapters

Chapter from Enforcement of Corporate and Securities Law: China and the World. Howson, N.C. and Huang, R.H., eds.

Corporate governance in Asia has garnered a great deal of recent scholarly attention.1 One topic that permeates discussions across countries is the enforcement of corporate and securities laws – with some countries relying primarily on public enforcement (i.e. enforcement by government) while others rely on some combination of public and private enforcement (i.e. enforcement by private shareholders). Further, understanding how enforcement is operationalised and its concomitant strengths and weaknesses enables us to better appreciate the actual corporate governance situation in many …


Conclusion - Between "Law In Books" And "Law In Action", Nicholas C. Howson, H. Huang Sep 2017

Conclusion - Between "Law In Books" And "Law In Action", Nicholas C. Howson, H. Huang

Book Chapters

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'.


Private Enforcement Of Company Law And Securities Regulation In Korea, Hwa-Jin Kim Aug 2017

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.


Stock Market Futurism, Merritt Fox, Gabriel Rauterberg Jul 2017

Stock Market Futurism, Merritt Fox, Gabriel Rauterberg

Articles

The U.S. stock market is undergoing extraordinary upheaval. The approval of the application of the Investors Exchange (IEX) to become the nation's newest stock exchange, including its famous "speed bump," was one of the SEC's most controversial decisions in decades. Other exchanges have proposed a raft of new innovations in its wake. This evolving equity market is a critical piece of national infrastructure, but the regulatory scheme for its institutions is increasingly frayed. In particular, current regulation draws sharp distinctions among different kinds of markets for trading stocks, treating stock exchanges as self-regulatory organizations immune from private civil litigation, while …


Lead Plaintiffs And Their Lawyers: Mission Accomplished, Or More To Be Done?, Adam C. Pritchard, Stephen Choi May 2017

Lead Plaintiffs And Their Lawyers: Mission Accomplished, Or More To Be Done?, Adam C. Pritchard, Stephen Choi

Law & Economics Working Papers

This chapter, written for the Research Handbook on Shareholder Litigation, surveys empirical work studying the lead plaintiff provision of the Private Securities Litigation Reform Act (PSLRA). That work finds that the lead plaintiff provision has encouraged institutional investors to participate in securities class actions and that those institutional investors have negotiated lower attorneys' fees. Those benefits from the lead plaintiff provision are undercut, however, by political contributions made by plaintiffs' lawyers. We suggest additional reforms to promote transparency and competition among lawyers for lead plaintiffs. We also suggest reforms to the lead plaintiff provision intended to enhance the screening effect …


Sec Enforcement Attorneys: Should I Stay Of Should I Go?, Adam C. Pritchard, Stephen J. Choi Jan 2017

Sec Enforcement Attorneys: Should I Stay Of Should I Go?, Adam C. Pritchard, Stephen J. Choi

Law & Economics Working Papers

We examine the career paths of attorneys in the Enforcement Division at the SEC. Using a variety of performance metrics, we find evidence that long term lawyers and lawyers in regional offices do not perform as well as other SEC attorneys. We also report that men and women may differ in their career paths in this field. We find that early-stage female attorneys perform just as well as male attorneys. Notwithstanding their comparable performance, these early-stage women are less likely to get a raise or promotion. We find that women are more likely to stay at the SEC, at least …


A Big Gap Between ‘Law In Books’ And ‘Law In Action’ And "A New Taxonomy Of Enforcement Strategies", Robin H. Huang, Nicholas C. Howson Jan 2017

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 Jan 2017

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, …


The Sec's Shift To Administrative Proceedings: An Empirical Assessment, Stephen J. Choi, Adam C. Prichard Jan 2017

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 …


The Sec, Administrative Usurpation, And Insider Trading, Adam C. Pritchard Oct 2016

The Sec, Administrative Usurpation, And Insider Trading, Adam C. Pritchard

Articles

The history of insider trading law is a tale of administrative usurpation and legislative acquiescence. Congress has never enacted a prohibition against insider trading, much less defined it. Instead, the SEC has led in defining insider trading, albeit without the formality of rulemaking, and subject to varying degrees of oversight by the courts. The reason why lies in the deference that the Supreme Court gave to the SEC in its formative years. The roots of insider trading law are commonly traced to the SEC’s decision in Cady, Roberts & Co. Cady, Roberts was only made possible, however, by the …


Carrot Or Stick? The Shift From Voluntary To Mandatory Disclosure Of Risk Factors, Karen K. Nelson, Adam C. Pritchard Jun 2016

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 Mar 2016

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 …