Securities Law Commons^™

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 …

Rethinking Transnational Adjudication: The Normative Foundations Of Institutional Design, Sanctions-Related Arbitration Frameworks, And Digital Recognition Systems, Avaskhan Asanaliyev

SJD Dissertations

This dissertation examines how emerging judicial and dispute resolution architectures can sustain cross-border commerce, investment, and enforcement in the post-Soviet space and beyond, at a time of institutional fragility, geopolitical tension, and rapid digitalization. Drawing on the experience of Kazakhstan, Russia, Ukraine, and key global hubs, it argues that institutional innovation in courts, arbitration, and enforcement mechanisms is central to rebuilding credible governance frameworks for international business. It does so through three interconnected studies that together explore the evolution of modern adjudication: first, through the transplantation of a common law judiciary model within a civil law state; second, through the …

"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 …

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 …

Blunting The “Tools At Hand”: Recent Developments In Delaware Books-And-Records Demand Law, Daniel Meyer

University of Miami Business Law Review

In recent years, and despite their heeding the guidance of Delaware courts, stockholders’ use of the statutory books-and-records investigation mechanism under Delaware Code Title 8, Section 220 (“Section 220”) has been much maligned, with commentators blaming Section 220 actions for straining judicial resources and causing companies unnecessary costs and burdens. Moreover, Delaware’s legislature and courts have taken steps to curb stockholders’ inspection rights, blunting a crucial tool needed to develop allegations in meritorious cases so that stockholders can bring cases that survive motions to dismiss and continue into plenary discovery.

Instead of blindly accepting a narrative regarding a Section 220 …

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 …

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 …

Unflexed Muscle: Sec Enforcement And Officer Sox 302 Certifications, Marc I. Steinberg, A.B. Steinberg

Faculty Journal Articles and Book Chapters

This article represents the first work to analyze the Securities and Exchange Commission’s neglect in its enforcement of the chief executive officer (CEO) and chief financial officer (CFO) Sarbanes-Oxley certification requirement. The article addresses the appropriate construction of the statute’s reach, the enforcement proceedings instituted by the SEC under this provision, and the Commission’s failure to fulfill its legislative directive to enforce this statute and Rule 13a-14 promulgated thereunder. In its implementation of the CEO and CFO certification requirement, the SEC has brought relatively few enforcement actions during over a two-decade period. Its enforcement with respect to CEOs and CFOs …

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 …

Understanding The Big Three’S Wavering Support Of Environmental And Social Shareholder Proposals, Jeff Schwartz, Jefferson Jensen

Seattle University Law Review

Because of their substantial equity portfolios, BlackRock, Vanguard, and State Street (the Big 3) are central players in corporate governance. It is, therefore, critical to understand how they vote. One puzzle is that their support for shareholder proposals on environmental and social matters appears to waiver. In 2020, for instance, BlackRock supported 11.1% of environmental proposals at S&P 500 firms. In 2021, it seemingly reversed course, supporting 55.2%. It then flipped again, supporting 32.1% in 2022. Such statistics suggest that the Big 3 are constantly changing their views on these topics. This Article seeks to better understand whether this is …

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 …

Anticipating The Effects Of The Brazilian New Business Environment Law's Corporate Governance Provisions On Minority Shareholder Protection, Dean Farmer

Michigan Business & Entrepreneurial Law Review

To encourage minority shareholder protections and public investment in Brazilian corporations, Brazil passed the New Business Environment Law. The New Business Environment Law’s Corporate Governance Provisions require that all corporations have at least one independent board member, have different individuals serving as their CEO and board chairperson, and grant increased power to the general shareholders’ meeting. This Note predicts that the New Business Environment Law’s Corporate Governance Provisions will have an inconsequential effect on Brazilian minority shareholder protections. Traditional American means of achieving minority shareholder protections may be ineffective in Brazil, due to legal, institutional, and cultural differences between the …

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 …

Uncovering Elon's Data Empire, Carliss Chatman, Carla L. Reyes

Faculty Journal Articles and Book Chapters

In 2022, Elon Musk publicly announced that he would purchase Twitter after acquiring a five percent stake in the company. His failure to report this acquisition—and the company’s failure to notice—allowed Musk to continue purchasing stock at a deflated price, costing the company more than $156 million. After the signing of a merger agreement, the details of the transaction caused wild fluctuations in Tesla’s stock price. Musk’s complaints about the management of Twitter and the existence of bots on the platform led Twitter’s stock to also drop in value, as did Musk’s attempts to withdraw from the transaction. Even after …

"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 …

Pricing Corporate Governance, Albert Choi

Articles

Scholars and practitioners have long theorized that by penalizing firms with unattractive governance features, the stock market incentivizes firms to adopt the optimal governance structure at their initial public offerings (IPOs). This theory, however, does not seem to match with practice. Not only do many IPO firms offer putatively suboptimal governance arrangements, such as staggered boards and dual-class structures, but these arrangements have been gaining popularity among IPO firms. This Article argues that the IPO market is unlikely to provide the necessary discipline to incentivize companies to adopt the optimal governance package. In particular, when the optimal governance package differs …

Wireless Investors & Apathy Obsolescence, Sergio Alberto Gramitto Ricci, Christina M. Sautter

Faculty Works

This Article discusses how a subgenre of retail investors makes investors’ apathy obsolete. In prior work, we dub retail investors who rely on technology and online communications in their investing and corporate governance endeavors “wireless investors.” By applying game theory, this Article discusses how wireless investors’ global-scale online interactions allow them to circulate information and coordinate, obliterating collective action problems.

Corporate Democracy And The Intermediary Voting Dilemma, Jill E. Fisch, Jeff Schwartz

Utah Law Faculty Scholarship

Corporate governance is changing. For the past two decades, the focus of shareholder voting and engagement was deconstructing impediments to shareholder power and increasing managerial accountability. The goal of these interventions was to increase firm value by reducing agency costs. Increasingly, however, environmental and social issues have risen to the fore. This new focus is arguably more about values than value. This Article is the first to argue that, because of this shift, institutional intermediaries—namely, pension and mutual fund managers—can no longer vote and engage on the affairs of their portfolio companies without seeking the input of the pension-plan participants …

Is "Public Company" Still A Viable Regulatory Category?, George S. Georgiev

Faculty Articles

This Article suggests that the ubiquitous “public company” regulatory category, as currently constructed, has outlived its effectiveness in fulfilling core goals of the modern administrative state. An ever-expanding array of federal economic regulation hinges on public company status, but “public company” differs from most other regulatory categories in that it requires an affirmative opt-in by the subject entity. In practice, firms today become subject to public company regulation only if they need access to the public capital markets, which is much less of a business imperative than it once was due to the proliferation of private financing options. Paradoxically, then, …

Systematic Stewardship: It's Up To The Shareholders – A Response To Profs. Kahan And Rock, Jeffrey N. Gordon

Faculty Scholarship

As the author of an article entitled “Systematic Stewardship,” I read Professors Kahan and Rock’s article “Systematic Stewardship with Tradeoffs” (K&R) with considerable interest. I acknowledge the limits on deep asset manager engagement with sources of systematic risk in light of present institutional arrangements and the politics of the moment. Yet I think the most important move in the K&R analysis — the privileging of a “single firm focus” in corporate law instead of a “portfolio firm focus” — simply doesn’t account for the evolution that has already occurred in law and practice.

Long before the development of index funds, …

The Corporate Forum, Sergio Alberto Gramitto Ricci, Christina M. Sautter

Faculty Works

In this response to Professor Jill Fisch’s article "GameStop and the Reemergence of the Retail Investor," we focus on one of the risks associated with the growth of retail investing that Fisch surveys, uncontrolled information sourcing. Drawing on our work on retail investors, we revisit an instrument dear to the U.S. Securities and Exchange Commission, whose potential has not been unleashed so far, the corporate forum. Our response succinctly discusses the main mechanics of the corporate forum, the benefits the corporate forum could provide, and the feasibility hurdles that might undermine the success of corporate forums.

A Proposed Sec Cyber Data Disclosure Advisory Commission, Lawrence J. Trautman, Neal Newman

Faculty Scholarship

Constant cyber threats result in: intellectual property loss; data disruption; ransomware attacks; theft of valuable company intellectual property and sensitive customer information. During March 2022, The Securities and Exchange Commission (SEC) issued a proposed rule addressing Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure, which requires: 1. Current reporting about material cybersecurity incidents; 2. Periodic disclosures about a registrant’s policies and procedures to identify and manage cybersecurity risks; 3. Management’s role in implementing cybersecurity policies and procedures; 4. Board of directors’ cybersecurity expertise, if any, and its oversight of cybersecurity risk; 5. Registrants to provide updates about previously reported cybersecurity …

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. …

Taking Corwin Seriously, Itai Fiegenbaum

Lewis & Clark Law Review

Corporate law’s most important development is founded on a misunderstanding of the channels and consequences of shareholder empowerment. The Article’s title references the seminal Delaware Supreme Court decision that ruled that a positive shareholder vote effectively insulates a friendly sale from judicial oversight. Central to Corwin’s reasoning is the notion that the shareholder vote provides an effective restraint against insider overreaching. Yet every deal that includes a premium over the market price is assured of shareholder approval. The doctrinal lynchpin’s real-life insignificance exposes a baffling inconsistency in contemporary takeover jurisprudence.

This Articles makes two novel contributions to the bourgeoning scholarship …

The Alchemy Of Effective Auditor Regulation, Sarah J. Williams

Lewis & Clark Law Review

The audit profession has repeatedly failed in its obligation to accurately opine on financial statements prepared by companies that trade in U.S. markets. The list of entities that have contributed to the quest for effective regulation of these auditors is long; it includes the American Institute of Certified Public Accountants (AICPA), the U.S. Securities and Exchange Commission (SEC), Congress, outside directors of public companies, and the Public Company Accounting Oversight Board (PCAOB), a recent congressional creation. Yet, despite 50 years of effort, the formula for efficacious oversight of the audit profession remains elusive.

This Article is the first in a …