Law Commons^™

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 …

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 …

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 …

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.

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 …

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.

'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 …

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) …

The Redemption Puzzle, Reuven S. Avi-Yonah

Articles

After the adoption of partial integration in 2003, there has been only a modest rise in dividends, but a sixfold increase in redemptions. This article argues that the explanation for that lies in the different treatment of dividends and capital gains to foreign shareholders and that Congress should respond by making sections 302 and 304 inapplicable to foreign shareholders.

Securities Class Actions Move North: A Doctrinal And Empirical Analysis Of Securities Class Actions In Canada, Adam C. Pritchard, Janis P. Sarra

Articles

The article explores securities class actions involving Canadian issuers since the provinces added secondary market class action provisions to their securities legislation. It examines the development of civil liability provisions, and class proceedings legislation and their effect on one another. Through analyses of the substance and framework of the statutory provisions, the article presents an empirical and comparative examination of cases involving Canadian issuers in both Canada and the United States. In addition, it explores how both the availability and pricing of director and officer insurance have been affected by the potential for secondary market class action liability. The article …

London As Delaware?, Adam C. Pritchard

Articles

Jurisdictional competition in corporate law has long been a staple of academic-and sometimes, political-debate in the United States. State corporate law, by long-standing tradition in the United States, determines most questions of internal corporate governance-the role of boards of directors, the allocation of authority between directors, managers and shareholders, etc.-while federal law governs questions of disclosure to shareholders-annual reports, proxy statements, and periodic filings. Despite substantial incursions by Congress, most recently in the Sarbanes-Oxley Act of 2002, this dividing line between state and federal law persists, so state law arguably has the most immediate impact on corporate governance outcomes.

London As Delaware?, Adam C. Pritchard

Articles

In the United States, state corporate law determines most questions of internal corporate governance - the role of directors; the allocation of authority between directors, managers, and shareholders; etc. - while federal law governs questions of disclosure to shareholders - annual reports, proxy statements, and periodic filings. Despite substantial incursions by Congress, most recently with the Sarbanes-Oxley Act, this dividing line between state and federal law persists, so state law arguably has the most immediate effect on corporate governance outcomes.

Do Investors In Controlled Firms Value Insider Trading Laws? International Evidence, Laura Nyantung Beny

Articles

This article characterizes insider trading as an agency problem in firms that have a controlling shareholder. Using a standard agency model of corporate value diversion through insider trading by the controlling shareholder, I derive testable hypotheses about the relationship between corporate value and insider trading laws among such firms. The article tests these hypotheses using firm-level cross-sectional data from twenty-seven developed countries. The results show that stringent insider trading laws and enforcement are associated with greater corporate valuation among the sample firms in common law countries, a result that is consistent with the claim that insider trading laws mitigate agency …

Stoneridge Investment Partners V. Scientific-Atlanta: The Political Economy Of Securities Class Action Reform, Adam C. Pritchard

Articles

I begin in Part II by explaining the wrong turn that the Court took in Basic. The Basic Court misunderstood the function of the reliance element and its relation to the question of damages. As a result, the securities class action regime established in Basic threatens draconian sanctions with limited deterrent benefit. Part III then summarizes the cases leading up to Stoneridge and analyzes the Court's reasoning in that case. In Stoneridge, like the decisions interpreting the reliance requirement of Rule 10b-5 that came before it, the Court emphasized policy implications. Sometimes policy implications are invoked to broaden the reach …

Insider Trading Laws And Stock Markets Around The World: An Empirical Contribution To The Theoretical Law And Economics Debate, Laura Nyantung Beny

Articles

The primary goal of this Article is to bring empirical evidence to bear on the heretofore largely theoretical law and economics debate about insider trading. The Article first summarizes various agency, market, and contractual (or "Coasian") theories of insider trading propounded over the course of this longstanding debate. The Article then proposes three testable hypotheses regarding the relationship between insider trading laws and several measures of stock market performance. Exploiting the natural variation of international data, the Article finds that more stringent insider trading laws are generally associated with more dispersed equity ownership, greater stock price accuracy and greater stock …

The Irrational Auditor And Irrational Liability, Adam C. Pritchard

Articles

This Article argues that less liability for auditors in certain areas might encourage more accurate and useful financial statements, or at least equally accurate statements at a lower cost. Audit quality is promoted by three incentives: reputation, regulation, and litigation. When we take reputation and regulation into account, exposing auditors to potentially massive liability may undermine the effectiveness of reputation and regulation, thereby diminishing integrity of audited financial statements. The relation of litigation to the other incentives that promote audit quality has become more important in light of the sea change that occurred in the regulation of the auditing profession …

Exchanges Of Multiple Stocks And Securities In Corporate Divisions Or Acquisitive Reorganizations, Douglas A. Kahn, Jeffrey S. Lehman

Articles

If specified conditions are satisfied, the Internal Revenue Code provides nonrecognition for gain or loss realized when stocks and securities of one corporation are exchanged for stocks and securities of another corporation. When the exchange is made as part of a corporate division (a split-off or a split-up), the principal nonrecognition provision is section 355; and when the exchange is made as part of an acquisitive reorganization, the principal nonrecognition provision is section 354. Complete nonrecognition is provided only when stock is exchanged solely for stock and securities are exchanged solely for securities of no greater principal amount. If, in …

Should Issuers Be On The Hook For Laddering? An Empirical Analysis Of The Ipo Market Manipulation Litigation, Adam C. Pritchard, Stephen J. Choi

Articles

On December 6, 2000, the Wall Street Journal ran a front-page story exposing abuses in the market for initial public offerings (IPOs). The story revealed "tie-in" agreements between investment banks and initial investors seeking to participate in "hot" offerings. Under those agreements, initial investors would commit to buy additional shares of the offering company's stock in secondary market trading in return for allocations of shares in the IPO. As the Wall Street Journal related, those "[c]ommitments to buy in the after-market lock in demand for additional stock at levels above the IPO price. As such, they provide the rocket fuel …

Too Busy To Mind The Business? Monitoring By Directors With Multiple Board Appointments, Stephen P. Ferris, Murali Jagannathan, Adam C. Pritchard

Articles

We examine the number of external appointments held by corporate directors. Directors who serve larger firms and sit on larger boards are more likely to attract directorships. Consistent with Fama and Jensen (1983), we find that firm performance has a positive effect on the number of appointments held by a director. We find no evidence that multiple directors shirk their responsibilities to serve on board committees. We do not find that multiple directors are associated with a greater likelihood of securities fraud litigation. We conclude that the evidence does not support calls for limits on directorships held by an individual.

Back To The 1930s? The Shaky Case For Exempting Dividends, Reuven S. Avi-Yonah

Articles

This article is based in part on the author’s U.S. Branch Report for Subject I of the 2003 Annual Congress of the International Fiscal Association, to be held next year in Sydney, Australia (forthcoming in Cahiers de droit fiscal international, 2003). He would like to thank Emil Sunley for his helpful comments on that earlier version, and Steve Bank, Michael Barr, David Bradford, Michael Graetz, and David Hasen for comments on this version. Special thanks are due to Yoram Keinan for his meticulous work on the EU regimes (see Appendix). All errors are the author’s. In this report, Prof. Avi-Yonah …

In Re Silicon Graphics Inc.: Shareholder Wealth Effects Resulting From The Interpretation Of The Private Securities Litigation Reform Act's Pleading Standard, Marilyn F. Johnson, Karen K. Nelson, Adam C. Pritchard

Articles

This Article presents an empirical study of changes in shareholder wealth resulting from the Ninth Circuit Court of Appeals decision in In re Silicon Graphics Inc. Securities Litigation, which interpreted the pleading provision established in the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Congress passed the Reform Act as part of an ongoing effort to protect corporations from abusive suits alleging "fraud by hindsight." In such suits, plaintiffs claimed that a sudden drop in a company's stock price was evidence that the issuer and its management covered up the bad news that led to the price drop. …

The Securities Litigation Uniform Standards Act Of 1998: The Sun Sets On California's Blue Sky Laws, David M. Lavine, Adam C. Pritchard

Articles

It is often said that California sets the pace for changes in America's tastes. Trends established in California often find their way into the heartland, having a profound effect on our nation's cultural scene. Nouvelle cuisine, the dialect of the Valley Girl and rollerblading all have their genesis on the West Coast. The most recent trend to emerge from California, instead of catching on in the rest of the country, has been stopped dead in its tracks by a legislative rebuke from Washington, D.C. California's latest, albeit short-lived, contribution to the nation was a migration of securities fraud class actions …

Corporations, Shareholders' Right To Have A Dividend Declared And Paid Out Of Surplus, Horace Lafayette Wilgus

Articles

In Dodge v. Ford Motor Co. (Mich. 1919), 170, N. W. 668, the questions were not new, and with one exception, the decision was not unusual, but the sums involved were enormos. The Motor Company was incorporated in 1903, under the general manufacturing incorporating act of Michigan (P. A. 232, 1903), for the manufacture and sale of automobiles, motors and devices incident to their construction and operation, with an authorized Capital Stock of $150,000-$100,000 then paid up, $49,000 in cash, $40,000 in letters patent issued and applied for, and $11,000 in machinery and contracts. In 1908 the stock was increased …

Corporation Liens On Stock, Edson R. Sunderland

Articles

At common law a corporation had no lien upon its stock for assessments unpaid or for debts due it from its shareholders.6 There are therefore but four possible methods by which liens could be created in favor of the corporation upon the stock which it issues, (i) by statute, (2) by charter, (3) by by-law, (4) by contract.

Purchase Of Shares Of Corporation By A Director From A Shareholder, Horace Lafayette Wilgus

Articles

It is generally laid down in the encyclopedias and text books, and affirmed in many court opinions that "the doctrine that officers and directors [of corporations] are trustees of the stockholders, applies only in respect to their acts relating to the property or business of the corporation. It does not extend to their private dealings with stockholders or others, though in such dealings they take advantage of knowledge gained through their official position."1 Much of this doctrine is based upon the language of Chief Justice SHAW in Smith v. Hurd2 decided in 1847. He said: "There is no legal privity, …

Right Of Joint Adventurers Holding All The Stock Of A Corporation To A Dissolution And Accounting In Equity, Horace Lafayette Wilgus

Articles

The case of Jackson v. Hooper, in the New Jersey Court of Errors and Appeals, decided February 28, 1910, by Judge DILL, (42 N. Y. Law Journal, March 8, 1910), overruling Vice Chancellor HOWELL, of the Court of Chancery (74 AtL. 130) presents interesting and unusual points in corporation and partnership law, and the jurisdiction of courts of equity over corporate affairs.