Securities Law Commons^™

The Coming Privatization Of Corporate Law, Dorothy S. Lund, Eric L. Talley

Faculty Scholarship

For more than a century, American corporate law has revolved around a simple competitive premise: State governments supply corporate law while companies choose their state of incorporation, and the market rewards the state offering the best corporate law product. Delaware’s longstanding market dominance (especially for public companies) is often explained through the confluence of its unusually attractive institutional package: expert judges, extensive precedent, a specialized bar, an enabling statute, and a legislature that — at least traditionally — treats corporate law as something to be calibrated technocratically rather than politicized.

Sticky Charters? The Surprisingly Tepid Embrace Of Officer-Protecting Waivers In Delaware, Jens Frankenreiter, Eric L. Talley

Faculty Scholarship

This article examines the response to Delaware’s much-heralded 2022 legal reform that permitted corporations, for the first time, to adopt charter provisions exculpating corporate officers from liability for breaching their fiduciary duty of care. Contrary to widespread predictions that corporate actors would swiftly adopt officer exculpation provisions, our analysis — using both traditional and generative artificial intelligence (AI) methods — reveals a surprisingly low rate of uptake, over three years after the reform’s enactment.

Our study makes both methodological and substantive contributions. Methodologically, we present a novel application of large language models (LLMs) to identify and interpret technical clauses in …

U.S. Shareholder Activism: Convergence With Japan, Nobuhisa Ishizuka

Faculty Scholarship

To many observers long accustomed to slow, incremental change, the current boom in shareholder activism in Japan comes as a surprise. The opening for U.S.-style activists was created by market conditions that eventually resulted in policy changes that attracted significant numbers of foreign investors. However, even the current market would not have emerged without a parallel evolution in U.S. hedge-fund tactics, which gradually shifted over a number of years to a sophisticated and more nuanced approach, one based on partnership and dialogue with target companies, in contrast to adversarial relationships and public campaigns. This article attempts to place current trends …

Flows, Financing Decisions, And Institutional Ownership Of The U.S. Equity Market, Alon Brav, Dorothy S. Lund, Lin Zhao

Faculty Scholarship

This Article analyzes the relationship between flows to institutional investment managers, corporate financing decisions, and institutional ownership of U.S. public equity. In so doing, it provides new evidence about the drivers of institutional investor growth in equity ownership over the past two decades. Contrary to conventional narrative, we find that equity capital flows into the “Big Three” investment managers have slowed in recent years, with substantial differences between each institution. We also present a framework to understand how fund characteristics and corporate actions such as stock buybacks and equity issuances combine to shape the evolution of institutional ownership, including that …

"Activist" Versus "Passive" Investors: A Closer Look At Proxy Contests And The Contemporary Balance Of Advantage, John C. Coffee Jr.

Faculty Scholarship

The era of the hostile takeover has clearly given way to the era of the proxy contest led by an activist hedge fund. Today, a record number of such contests are underway, and they have changed the board composition at many U.S. companies and caused a record number of CEO resignations. But there is a mystery here: when activist funds negotiate for changes with target managements, they often obtain meaningful changes in the board of directors and corporate policies. However, when activists attempt a proxy contest, they have generally been unsuccessful, winning only a small number of seats in a …

Crypto Litigation And Market Efficiency, Robert E. Bishop, Bradford Levy, Frank Partnoy, Daniel Taylor, Andrew Yeh

Faculty Scholarship

This paper investigates, for the first time in the literature, the factors that should matter to courts in determining whether a crypto  market is “efficient,” meaning that prices are sufficiently responsive to information. Based on new empirical evidence and a series of event studies, we recommend a new judicial framework for assessing market  efficiency in crypto litigation.

Market efficiency tests based on event studies have played an important role in other areas of litigation, particularly securities litigation, where courts frequently rely on what have become known as the “Cammer factors.” Academics have not yet assessed the extent to which market …

Leaving Delaware? The Essential Role Of Specialized Corporate Courts, Zohar Goshen, Tomer S. Stein

Faculty Scholarship

Following the Delaware Court of Chancery’s invalidation of Elon Musk’s fifty-six- billion-dollar compensation package, Tesla moved its incorporation from Delaware to Texas. Shortly thereafter, Delaware’s legislature, seeking to protect Delaware’s dominant incorporation position, passed the most sweeping corporate law amendments in fifty years.

Both supporters of Musk and defenders of Delaware’s judiciary have accused each other of partisanship, but neither side has addressed the central question: What is the role of specialized corporate courts?

This Essay presents a novel theory of why such courts are necessary. Corporate disputes are distinct because they arise within ongoing relationships between shareholders and management, …

The Gamification Of Banking, Colleen Baker, Christopher K. Odinet

Faculty Scholarship

Gamification is coming to banking. This phenomenon is already gain-ing ground in advertising, healthcare, manufacturing, and, more recently, with the GameStop and AMC meme stock saga in securities trading. The idea behind gamification is to make transactions seem fun, playful, and even casino-like in order to elicit habit-forming, addictive-like effects with consumers. This Article argues that the rise of financial technology (“fintech”) firms and their ever-growing business relationships with incumbent financial institutions has created the necessary conditions for gamification to take hold in the banking sector. In order to explore this observation, we undertake a study of current examples of …

The Sec Proposed Cybersecurity Infrastructure Rules And New Disclosure Requirements, Neal F. Newman, Lawrence J. Trautman, Brian Elzweig

Faculty Scholarship

In addition to regulation of securities market issuers, the Securities & Exchange Commission (SEC) is also responsible for regulation of those entities that provide the networks, either electronic or physical, that enable the functioning of our securities markets. On February 9, 2022, the Commission published a Release for Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies containing proposals that, if adopted, would establish a new cybersecurity incident reporting and disclosure regime and require registered investment advisers (“advisers”) and investment companies (“funds”) to implement policies and procedures designed to address cyber risks. The comment period for …

The Past, Present, And Future Of Proxy Voting Choice, Dorothy S. Lund

Faculty Scholarship

This article provides an early attempt at understanding what voluntary pass-through voting could mean for the marketplace. I first provide an overview of my argument in my 2018 Journal of Corporation Law article and the events that followed. I then survey passthrough voting initiatives that have taken hold at three asset managers — BlackRock, Vanguard, and State Street. I then conclude with some preliminary observations about how voting choice is likely to affect the proxy voting landscape and outline open questions.

Beyond Issuers: The Future Of Private Securities Litigation, Joshua Mitts

Faculty Scholarship

Private securities litigation has traditionally been viewed as a subfield of corporate governance, reducing agency costs by disciplining wayward management. In this brief Symposium essay, I argue that the future of private securities litigation lies beyond issuers. I discuss how a fraud claim under Rule 10b-5 can be understood as a kind of economic tort, and set out, in broad strokes, an economic analysis of claims against non-issuer defendants. I then consider emerging trends in the case law against non-issuers in social media and market manipulation cases. I conclude by identifying some challenges and opportunities for securities litigation in a …

The Sec, Fraud, And Cryptocurrencies, Lawrence J. Trautman, Brian Elzweig, Neal F. Newman

Faculty Scholarship

The SEC’s Strategic Plan for Fiscal Years 2022–2026 is focused on the impact of the rapidly developing rate of change in new technologies that provide for markets to be more interconnected and interdependent than ever. Because Congress has yet to give the SEC, or any other agency, express authority to regulate cryptocurrency, the SEC has taken a regulation-by-enforcement approach. The SEC’s recent enforcement efforts relating to crypto asset securities were substantial, with enforcement actions addressing a range of alleged misconduct in the crypto asset securities space, including billion- dollar crypto fraud schemes; unregistered crypto asset offerings, platforms, and intermediaries; and …

Debt Tokens, Andrea Tosato, Diane Lourdes Dick, Christopher K. Odinet

Faculty Scholarship

The worlds of crypto and bankruptcy have collided. Once-prominent, fast-growing, and even politically influential platforms for trading cryptocurrencies have imploded spectacularly. Gone are the glossy advertisements, celebrity endorsements, and proclamations that blockchain operates as a law unto itself. Instead, insolvent crypto businesses—including the crypto exchange giant FTX—find themselves in bankruptcy court, no different from any other failed enterprise. These bankruptcies reveal a startling reality: individual investors who placed their trust in these platforms have been stripped of their digital assets. In their stead, they hold hard-to-collect claims against these defunct platforms.

Amid the chill of the crypto winter, bankruptcy has …

Capital Formation, The Sec, And Accredited Investors, Neal F. Newman, Lawrence J. Trautman, Brian Elzweig

Faculty Scholarship

Protecting the investing public, while simultaneously facilitating the efficient flow of capital needed by all new and growing businesses continues as a primary responsibility of the U.S. Securities and Exchange Commission (SEC). Enhancing the capital formation process is a necessary step in the creation of jobs and growth of any economy. Central to the SEC’s regulatory schematic is the proposition that some particularly sophisticated and wealthy investors require less protection than those with less knowledge, experience, and resources. During December 2023, for just the third time, the SEC staff issued a report examining the status of the natural person accredited …

Guide To Sec And Business Open Source Corporate Intelligence, Lawrence J. Trautman, Brian Elzweig, Neal F. Newman

Faculty Scholarship

An agency of the U.S. intelligence community observes, "The explosion of open source intelligence (OSINT) in recent years has transformed how governments and people around the world consume and process information about society and global issues." It is likely that "We all use open-source and probably don't even realize it, but we also use it for different reasons. You might use open-source information to do a credibility check and to find out more about the person selling you something on Facebook marketplace." Others "may research someone… met on a dating app or before hiring someone for a job." Every use …

Can Section 11 Be Saved?: "Tracing" A Path To Its Survival, John C. Coffee Jr., Joshua Mitts

Faculty Scholarship

Last term, a unanimous Supreme Court held in Slack Techs. v Pirani that purchasers of securities must “trace” their shares to the registration statement that contains the alleged misstatement or omission in order to be able to assert a claim under Section 11 of the Securities Act of 1933. Lawyers and law firms on both sides of the case agreed (with differing emotions) that the decision eclipsed Section 11, which had been the federal securities laws’ strongest litigation remedy for investors. We disagree with this conclusion that Section 11 is doomed, but we recognize the danger. Both in an amicus …

Sex & Startups, Jens Frankenreiter, Talia B. Gillis, Eric L. Talley

Faculty Scholarship

Private law offers a unique solution to the problem of long-term fiscal commitment. When Congress enacts a spending program that will take many years to reach fruition, there is a risk of a subsequent Congress or President cutting off funding in the interim. There is no escape from the problem within appropriations law itself. One solution, however, is to entrust private sector allies as vessels of long-term commitment. As a matter of political economy, that solution draws on policy-feedback theory. As a matter of law, the solution rests on a mechanism that Congress already uses but has not recognized its …

Shadow Banking And Securities Law, Gabriel Rauterberg, Jeffery Y. Zhang

Faculty Scholarship

Shadow banking may be the single greatest challenge facing financial regulation. Financial institutions that function like banks, but fall outside the scope of banking regulation — aptly termed “shadow banks” — were at the heart of the Global Financial Crisis and most episodes of serious financial stress since then. Scholars have largely focused on one response to this problem: extending traditional banking regulation to shadow banks. Yet more than fifteen years after the crisis, major regulatory efforts along this route have stalled.

In this Article, we explore the uneasy case for greater regulation of shadow banking through a different route …

Shadow Investment Companies, William A. Birdthistle, Gabriel Rauterberg, Jeffery Y. Zhang

Faculty Scholarship

Stablecoins are cryptocurrencies designed to track the value of fiat currency, most commonly the U.S. dollar. Over the past decade, they have grown from a niche innovation into the primary gateway between crypto markets and the traditional financial system, with daily trading volumes exceeding $100 billion. Despite their scale and centrality, stablecoin issuers occupy an uncertain and increasingly contested regulatory space.

This Article argues that the largest stablecoin issuers — such as Circle and Tether— are best understood not as banks or payments firms, but as investment companies under the Investment Company Act of 1940. As a matter of statutory …

Should We Watch The Watcher Or The Watched? The Transparency Debate In Auditor Regulation, Sarah Williams

Faculty Scholarship

Federal law has mandated the use of outside auditors by public companies since 1934. For much of that time, the audit industry watched itself. It monitored audit quality and decided how to address auditor misconduct. In 2002, Congress created the Public Company Accounting Oversight Board (“PCAOB” or “Board”) to watch the auditors. The legislation designed a regulatory scheme that presumed audit performance could be improved through an open and cooperative relationship between the regulator and the regulated audit firm. Congress created accountability for the agency by mandating that it disclose its oversight activities to the public (an approach characterized as …

How Artificial Intelligence Will Shape Securities Regulation, Gabriel Rauterberg

Faculty Scholarship

How will the increasing prevalence and sophistication of artificial intelligence (AI) change the doctrine and practice of securities law? My main thesis is that it will push securities regulation toward a more systems-oriented approach. This approach will replace securities law’s emphasis, in areas like manipulation, on forms of enforcement targeted at specific individuals and accompanied by punitive sanctions with a greater focus on ex ante rules designed to shape an ecology of actors and information.

Altering Rules: The New Frontier For Corporate Governance, Gabriel Rauterberg, Sarath Sanga

Faculty Scholarship

Corporate law has taken a contractarian turn. Shareholders are increasingly contracting around its foundational rules — statutory rights, the fiduciary duty of loyalty, even the central role of the board — and Delaware courts are increasingly enforcing these contracts. In the one case where they did not, the legislature swiftly overruled the decision and adopted a new statutory provision permitting boards to completely cede their powers to a shareholder by contract. These developments have sparked a polarized debate, with some calling for a return to mandatory rules, while others push for total contractual freedom.

We argue, however, that the best …

Unequal Ownership, Ofer Eldar, Rory Van Loo

Faculty Scholarship

Market concentration and weak competition do not just lead to lower efficiency but also result in corporate profits flowing primarily to wealthy households that own a disproportionate share of public corporations. We demonstrate that this is a growing distributional problem not only due to familiar reasons in the literature, most notably shifts in market power, but also due to changes in the socio-economic makeup of ownership. Over the past twenty years, households in the bottom 90 percent of wealth have seen their share of stock ownership decline by half. That is, the ownership of corporations has become increasingly concentrated among …

Giant Asset Managers, The Big Three, And Index Investing, Dorothy S. Lund, Adriana Z. Robertson

Faculty Scholarship

A robust literature describes the incentives and stewardship practices of the “Big Three” asset managers (BlackRock, Vanguard, and State Street Global Advisors), often referring to these asset managers as “passive.” This is so common that the “Big Three,” “index fund,” and “passive manager” are used almost interchangeably by both academics and practitioners. This shorthand emerged in the foundational scholarship in this area, and while it may remain useful in certain contexts, its casual use obscures important features of the market and contributes to misperceptions. In this chapter, we demonstrate that it is a mistake to equate passive investing with index …

Transaction-Specific Tax Reform In Three Steps: The Case Of Constructive Ownership, Thomas J. Brennan, David M. Schizer

Faculty Scholarship

Similar investments are often taxed differently, rendering our system less efficient and fair. In principle, fundamental reforms could solve this problem, but they face familiar obstacles. So instead of major surgery, Congress usually responds with a Band-Aid, denying favorable treatment to some transactions, while preserving it for others. These loophole-plugging rules have become a staple of tax reform in recent years. But unfortunately, they often are ineffective or even counterproductive. How can Congress do better? As a case study, we analyze Section 1260, which targets a tax-advantaged way to invest in hedge funds. This analysis is especially timely because a …

Manipulating Citadel: Profiting At The Expense Of Retail Stock Traders' Market Makers, Merritt B. Fox, Lawrence R. Glosten, Sue S. Guan

Faculty Scholarship

This Article considers whether securities market strategies designed to profit at the expense of so-called “internalizers” should properly be considered illegal manipulation. An internalizer acquires from a brokerage firm the right to be the market maker for the broker’s full order flow from its retail customers, promising in return to execute each order at a price slightly better than the best price available on any exchange (“price improvement”) as well as to pay the broker a fee for each executed order (“payment for order flow”). Almost all retail trading — about 29% of the country’s total share volume — is …

"Don't Go Chasing Waterfalls": Fiduciary Duties In Venture Capital Backed Startups, Sarath Sanga, Eric L. Talley

Faculty Scholarship

We develop a model of venture capital contracting and use it to evaluate an emergent set of judicial precedents in corporate law, which we label the Trados doctrine. In our model, founders hold common stock, while venture capital investors hold convertible preferred stock. We show that preferred shareholders have inefficient incentives to liquidate low-valued firms and to continue high-valued firms, while common shareholders inefficiently favor the opposite. The extent of incentive misalignment depends on the firm’s intrinsic and outside valuations, and it is most severe around preferred shareholders’ liquidation preference and conversion point. Although legal liability rules can rectify these …

The Rise Of Private Equity Continuation Funds, Kobi Kastiel, Yaron Nili

Faculty Scholarship

This Article provides the first comprehensive examination of an emerging practice within the private equity sector: continuation funds. Continuation funds break from the traditional private equity model by allowing sponsors to hold on to assets beyond the typical fund term and, instead of selling the assets to third parties, sell them to their own newly established fund. Lauded by the private equity industry as providing “optionality” to investors by allowing them to cash out or roll over, continuation funds have grown to represent a major segment of investment activity in the United States. Despite their surging popularity among private equity …

The Limits Of Individual Prosecutions In Deterring Corporate Fraud, Samuel W. Buell

Faculty Scholarship

Fifteen years after the largest financial scandal and economic crisis in a century, discussion of the problem of corporate crime too often borders on cliché. Endless calls from Congress, the media, the public, many scholars, and even the Justice Department itself, to recommit, over and over, to locking up more managers and executives to deter corporate wrongdoing portray the problem as relatively straightforward and blame legislative and executive failure of will. Through examination of the litigation record from over 100 prosecutions spanning the period from the 2008 financial crisis to the present, this Article presents evidence that relying on individual …

Fractionalizing Investment Securities: Using Fintech To Expand Financial Inclusion, Steven L. Schwarcz, Robert Bourret

Faculty Scholarship

Recent innovations in financial technology, or “FinTech,” are enabling the fractionalization of investment securities, such as shares of stock and bonds. We explain how this fractionalization can fundamentally expand financial inclusion both for investors and for businesses, including small and medium-sized enterprises (SMEs). Using the fractionalization of investment securities as a model, we also counter the argument that FinTech-enabled transactions should not need regulation because they are governed by mathematical algorithms under so-called smart contracts. Additionally, we derive and test a regulatory framework to identify and help to mitigate the risks caused by fractionalization. In the process, we also explain …