Business Organizations Law Commons^™

The Empagran Exception: Between Illinois Brick And A Hard Place, Victor P. Goldberg

Faculty Scholarship

Before it was uncovered and prosecuted, the international vitamin cartel, known as "Vitamins, Inc." by its perpetrators, was extraordinarily successful. Estimates of cartel profits run as high as $18 billion (in 2003 dollars). In addition to substantial criminal sanctions, cartel members paid over $2 billion to American plaintiffs. When foreign plaintiffs tried to sue the foreign defendants in American courts, however, they encountered resistance. A trial court read the Foreign Trade Antitrust Improvements Act ("FTAIA") to restrict the reach of the Sherman Act and preclude foreign purchasers from suing the foreign defendants. The D.C. Circuit reversed, holding that the facts …

Voting Integrity: Practices For Investors And The Global Proxy Advisory Industry, Meagan Thompson-Mann

Ira M. Millstein Center for Global Markets and Corporate Ownership

Accountability of corporate boards to shareowners rests in large part on the integrity of the system by which investors vote their proxy ballots. Shareowners rely on the vote to affect the governance of a company; corporate directors see the vote as a barometer of investor confidence in board stewardship. Outcomes determine the fate of director tenure, mergers, acquisitions, capital raising, remuneration plans and other critical decisions with sometimes profound consequences for stakeholders and the marketplace.

However, this briefing finds that the proxy voting system in the US and other markets is chronically subject to criticism that it is short on …

Chairing The Board: The Case For Independent Leadership In Corporate North America, Millstein Center For Corporate Governance And Performance

Ira M. Millstein Center for Global Markets and Corporate Ownership

The number of non-executive chairmen at companies in North America has been increasing year by year. Recent figures, according to the 2008 Spencer Stuart Board Index, indicate that the last decade has seen a growing trend in separating the roles of the Chief Executive Officer (ceo) and the chairman of the board. In 1998, 16% of the s&p 500 featured distinct chairmen. Data shows that in 2008 as many as 39% appoint someone other than the ceo to chair the board. Traditionally, even in companies that split the role, the chairman was not completely independent, but rather commonly the ex-ceo …

Pay, Risk And Stewardship: Private Sector Architecture For Future Capital Markets, Mariana Pargendler

Ira M. Millstein Center for Global Markets and Corporate Ownership

The recent financial crisis revealed a massive failure of institutions that populate the world’s capital markets. Banks, investors, ratings agencies, regulators and numerous other players demonstrated that confidence in market responses was misplaced. The loss of faith in capital market institutions has represented a significant hurdle to recovery as financial institutions continue to be wary of one another, and the public is wary of all of them.

Restoring trust in the system requires two distinct pillars of reform. The first pillar, reform of the financial regulatory system, both nationally and globally, has received most of the attention so far. Many …

Agenda For Private Sector Reform: Omnibus Policy Recommendations For A Post-Crisis Market, Millstein Center For Corporate Governance And Performance

Ira M. Millstein Center for Global Markets and Corporate Ownership

The global financial crisis has exposed a raft of market weaknesses and failures The Center has concentrated on probing urgent, corporate governance-related issues where it identified apparent gaps in knowledge, insight and infrastructure. Policy Briefings have addressed the advisory vote on executive compensation; board-shareowner communications; proxy voting reform; independent board leadership; risk oversight; pay for performance; and shareowner stewardship. Using global perspectives, they address key concerns within the relevant subject areas and attempt to gather and present practical recommendations and ideas.

This report compiles summaries of the Center’s recommendations on these seven key areas from 2007 through mid-2009. The objective …

Civil Liability And Mandatory Disclosure, Merritt B. Fox

Faculty Scholarship

This Article explores the efficient design of civil liability for mandatory securities disclosure violations by established issuers. An issuer not publicly offering securities at the time of a violation should have no liability. Its annual filings should be signed by an external certifier – an investment bank or other well-capitalized entity with financial expertise. If the filing contains a material misstatement and the certifier fails to do due diligence, the certifier should face measured liability. Officers and directors should face similar liability, capped relative to their compensation but with no indemnification or insurance allowed. Damages should be payable to the …

Public Ownership. Firm Governance, And Litigation Risk, Eric L. Talley

Faculty Scholarship

Many going-private transactions are motivated – at least ostensibly – by the desire to escape the burdens and costs of public ownership. Although these burdens have many purported manifestations, one commonly cited is the risk of litigation, which may be borne both directly by the firm and/or its fiduciaries or reflected in director and officer insurance premia funded at company expense. An important issue for the "litigation risk" justification of privatization is whether alternative (and less expensive) steps falling short of going private – such as governance reforms – may augur sufficiently against litigation exposure. In this Article, I consider …

Creditor Control And Conflict In Chapter 11, Kenneth M. Ayotte, Edward R. Morrison

Faculty Scholarship

We analyze a sample of large privately and publicly held businesses that filed Chapter 11 bankruptcy petitions during 2001. We find pervasive creditor control. In contrast to traditional views of Chapter 11, equity holders and managers exercise little or no leverage during the reorganization process. 70 percent of CEOs are replaced in the two years before a bankruptcy filing, and few reorganization plans (at most 12 percent) deviate from the absolute priority rule to distribute value to equity holders. Senior lenders exercise significant control through stringent covenants, such as line-item budgets, in loans extended to firms in bankruptcy. Unsecured creditors …

Redesigning The Sec: Does The Treasury Have A Better Idea?, John C. Coffee Jr., Hillary A. Sale

Faculty Scholarship

Symposiums supply a snapshot in time. By observing the common assumptions and shared frameworks of a collection of scholars writing contemporaneously, one gains both insight into the intellectual world of a past era and the ability to measure its distance from our own. Twenty-five years ago the Virginia Law Review organized a noted symposium (the "1984 Symposium") to celebrate the 50th anniversary of the SEC. A number of prominent scholars participated, and its articles have been much cited.

Bankruptcy's Rarity: An Essay On Small Business Bankruptcy In The United States, Edward R. Morrison

Faculty Scholarship

Most nations have enacted statutes governing business liquidation and reorganization. These statutes are the primary focus when policymakers and scholars discuss ways to improve laws governing business failure. This focus is misplaced, at least for distressed small businesses in the United States.

Evidence from a major credit bureau shows that over eighty percent of these businesses liquidate or reorganize without invoking the formal Bankruptcy Code.

The businesses instead invoke procedures derived from the laws of contracts, secured lending, and trusts. These procedures can be cheaper and speedier than a formal bankruptcy filing, but they typically require unanimous consent of senior, …

Sovereign Wealth Funds And Corporate Governance: A Minimalist Response To The New Mercantilism, Ronald J. Gilson, Curtis J. Milhaupt

Faculty Scholarship

Keynes taught years ago that international cash flows are always political. Western response to the enormous increase in the number and the assets of sovereign wealth funds (SWFs), and other government-directed investment vehicles that often get lumped together under the SWF label, proves Keynes right. To their most severe critics, SWFs are a threat to the sovereignty of the nations in whose corporations they invest. The heat of the metaphors matches the volume of the complaints. The nations whose corporations are targets of investments are said to be threatened with becoming "sharecropper" states if ownership of industry moves to foreign-government …

Proxy Contests In An Era Of Increasing Shareholder Power: Forget Issuer Proxy Access And Focus On E-Proxy, Jeffrey N. Gordon

Faculty Scholarship

The current debate over shareholder access to the issuer's proxy statement for the purpose of making director nominations is both overstated in its importance and misses the serious issue in question. The Securities and Exchange Commission's ("SEC's") new e- proxy rules, which permit reliance on proxy materials posted on a website, should substantially reduce the production and distribution cost differences between a meaningful contest waged via the issuer's proxy and a freestanding proxy solicitation. No matter which avenue is used, however, the serious question relates to the appropriate disclosure required of a shareholder nominator. Should the nominator be subject to …

Gatekeeper Failures: Why Important, What To Do, Merritt B. Fox

Faculty Scholarship

The United States was hit by a wave of corporate scandals that crested between late 2001 and the end of 2002. Some were traditional scandals involving insiders looting company assets – the most prominent being Tyco, HealthSouth, and Adelphia. But most were what might be called "financial scandals": attempts by an issuer to maximize the market price of its securities by creating misimpressions as to what its future cash flows were likely to be. Enron and WorldCom were the most spectacular examples of these financial scandals. In scores of additional cases, the companies involved and their executives were sued by …

Who Needs Bankruptcy Law?, Edward R. Morrison

Faculty Scholarship

This essay summarizes four papers: “Bargaining Around Bankruptcy: Small Business Distress and State Law,” 38 Journal of Legal Studies 255 (2009); “Bankruptcy’s Rarity: An Essay on Small Business Bankruptcy in the United States,” 5 European Company & Financial Law Review 172 (2008); “Small Business Bankruptcy and the Bankruptcy Abuse and Consumer Protection Act of 2005,” A Report to the United States Small Business Administration (2007); and Douglas G. Baird & Edward R. Morrison, “Serial Entrepreneurs and Small Business Bankruptcies,” 105 Columbia Law Review 2310 (2005).

A Requiem For Sam's Bank, Ronald J. Mann

Faculty Scholarship

This paper situates Wal-Mart's failed application to form a banking subsidiary in the context of payments policy. Generally, I argue that permitting Wal-Mart to have a bank would have a salutary effect on the relatively uncompetitive market for payment networks. The dominant position of Visa and MasterCard, in which payments are priced above cost to subsidize credit, inevitably will give way to a world in which payment services are priced at cost, or even below cost as a loss-leader to attract customers to other goods and services. Entry into this market by Wal-Mart would be likely to spur more robust …

Talking Governance: Board-Shareowner Communications On Executive Compensation, Stephen Davis, Stephen Alogna

Ira M. Millstein Center for Global Markets and Corporate Ownership

Advantages stemming from board-shareowner communications on governance and executive pay outweigh the potential risks and costs of such dialogue. Regulation FD in the US should be seen as a caution rather than a barrier to such communication. Prompted by universal adoption of advisory ‘say on pay’ resolutions, UK companies have moved to integrate regular engagement with domestic investors into the annual process of framing corporate remuneration policies. Most US companies have not fully endeavored to engage their shareowners in the same manner, but some—motivated sometimes by crises—are experimenting with various models of dialogue. Companies can best manage effective engagement when …

The Market For Bad Legal Advice: Academic Professional Responsibility Consulting As An Example, William H. Simon

Faculty Scholarship

Clients demand bad legal advice when legal advice can favorably influence third-party conduct or attitudes even when it is wrong. Lawyers supply bad legal advice most readily when they are substantially immunized from accountability to the people it is intended to influence. Both demand and supply conditions for a flourishing market are in place in several quarters of the legal system. The resulting practices, however, are in tension with basic professional and academic values. I demonstrate these tensions through critiques of the work of academic professional responsibility consultants in such matters as Enron, Lincoln Savings & Loan, and a heretofore …

We Are All Entrepreneurs Now, David E. Pozen

Faculty Scholarship

A funny thing happened to the entrepreneur in legal, business, and social science scholarship. She strayed from her capitalist roots, took on more and more functions that have little to do with starting or running a business, and became wildly popular in the process. Nowadays, "social entrepreneurs" tackle civic problems through innovative methods, "policy entrepreneurs" promote new forms of government action, "norm entrepreneurs" seek to change the way society thinks or behaves, and "moral entrepreneurs" try to alter the boundaries of duty or compassion. "Ethnification entrepreneurs," "polarization entrepreneurs," and other newfangled spinoffs pursue more discrete objectives. Entrepreneurial rhetoric has never …

Just Until Payday, Ronald J. Mann, Jim Hawkins

Faculty Scholarship

The growth of payday lending markets during the last fifteen years has been the focus of substantial regulatory attention both in the United States and abroad, producing a dizzying array of initiatives by federal and state policymakers. Those initiatives have had conflicting purposes – some have sought to remove barriers to entry while others have sought to impose limits on the business. As is often the case in banking markets, the resulting patchwork of federal and state laws poses a problem when one state is able to dictate the practices of a national industry. For most of this industry's life, …

Dividend Taxation In Europe: When The Ecj Makes Tax Policy, Alvin C. Warren, Michael J. Graetz

Faculty Scholarship

This article analyzes a complex line of recent decisions in which the European Court of Justice has set forth its vision of a nondiscriminatory system for taxing corporate income distributed as dividends within the European Union. We begin by identifying the principal tax policy issues that arise in constructing a system for taxing cross-border dividends and then review the standard solutions found in national legislation and international tax treaties. Against that background, we examine in detail a dozen of the Court's decisions, half of which have been handed down since 2006. Our conclusion is that the ECJ is applying a …

Leo Strine's Third Way: Responding To Agency Capitalism, Ronald J. Gilson

Faculty Scholarship

Ten years ago, Tony Blair's "New Labour" government sought an agenda that replaced ideology with a pragmatic focus on both the creation of wealth and its distribution. Not surprisingly, part of this effort involved proposals to bridge the gap between capital and labor through refraining corporate governance. A "third way" as it was then styled, would walk a fine line between privileging markets and allocational efficiency at the cost of social justice on the one hand, and accepting less for everyone as long as the distribution was fair on the other. Motivated by changes in how we save for retirement …