Volume 18

Volume 18.1

All Stick and No Carrot? Reforming Public Offerings

Stephen J. Choi and A.C. Pritchard

The SEC heavily regulates the traditional initial public offering (IPO). Those regulatory burdens fuel interest in alternative paths for private companies to go public, “regulatory arbitrage.” The SEC’s response to the emergence of alternatives, most recently SPACs and direct listings, has been to re-assert the regulatory protections in a traditional IPO, including heightened liability under Section 11 of the Securities Act. The SEC’s treatment of the traditional IPO regulatory process as a one-size-fits-all regime ignores the weaknesses of this process, in particular the informational inefficiency of the book-building process. In this essay we argue that the agency’s focus in regulating issuers going public should be on promoting market pricing driven by sophisticated investors with access to credible disclosure. We propose an alternative approach that provides issuers with a clear choice in going public: (1) provide disclosures for a seasoning period prior to listing their securities for public trading, with corresponding reductions in regulatory requirements for going public (the “carrot”); or (2) impose heightened liability on company’s going public without a seasoning period, not only for registration statements, but also for the company’s periodic disclosures released during a post-offering seasoning period (the “stick”). We argue that such a regime would push issuers to maximize the joint welfare of both issuers and investors.

Misaligned Measures of Control: Private Equity’s Antitrust Loophole

Aslihan Asil, John M. Barrios, and Thomas G. Wollmann

Agencies and legislators have raised concerns that acquisitions backed by private equity (PE) threaten competition, but few, if any, have offered explanations as to why they pose a unique threat. In this article, we argue that many PE-backed acquisitions may avoid antitrust enforcement because they escape detection. Under the Hart-Scott-Rodino Antitrust Improvements Act, parties intending to merge must notify federal authorities and wait for clearance. However, various exemptions exist based on the size of the transaction, parties involved, and proportion of control conferred by the merger. Recent work demonstrates that to police mergers effectively, agencies must be informed about transactions in their incipiency, meaning that in many economically important industries, the contours of the premerger notification program under the Act are, in practice, the same as the contours of the substantive legal standard. We show that when the Act’s exemptions are applied to PE’s standard investment structure, which use an array of intermediate special purpose vehicles to minimize taxes, share risks, and distribute fees, PE-backed acquisitions that would otherwise be reportable may be exempt. We support our argument with merger and filing data.

The Securities and Exchange Commission as Human Rights Enforcer?

Jena Martin and Rachel Chambers

On April 28, 2022, the Securities and Exchange Commission (SEC) announced that it had charged Brazilian mining company Vale with misleading investors about safety issues prior to a deadly dam collapse that killed hundreds and led to significant environmental harm in the Brazilian state of Minas Gerais. The action against Vale was largely seen as the agency’s first significant move after it had created an Environmental, Social, and Governance (ESG) Task Force within the Division of Enforcement, the purpose of which is to identify and investigate ESG-related violations.

This action against Vale also emerged at a time when scholars, practitioners, and regulators, are engaged in a larger debate regarding what role the SEC should have in regulating corporate actions and statements that are connected to human rights harms. Here, we move the debate forward by offering a first-of-its kind analysis regarding whether the SEC’s Division of Enforcement—as the country’s leading financial markets enforcer—should broaden its focus to include issues that would traditionally fall within a business and human rights, i.e., non-financial, framework.

Our analysis comes at a particularly prescient time in the agency’s history: on March 4, 2021, the SEC announced the creation of an “Enforcement Task Force” that would focus on ESG. In this article, we argue that there are three developments, in particular, that have led to the Division of Enforcement’s prioritization of this issue. First, institutional investors have become increasingly engaged with corporations (e.g., through shareholder proposals and shareholder litigation) regarding issues that implicate broader societal impacts. A second development relates to the impact that external rule setters have had on ESG reporting by corporations, particularly in the global context. Finally, the Division of Enforcement’s actions comes at a time when the agency, more generally, has embarked on a rulemaking process surrounding ESG disclosure requirements for both corporations and institutional investors.

We believe that these three developments, in turn, have created mutually reinforcing notions regarding what the “reasonable” investor considers material (a key element in securities fraud litigation). As a result, the landscape regarding what types of cases are brought under securities fraud may broaden significantly soon. Is this, however, a welcome development? We conclude that, while not ideal, the SEC’s potential to expand case law in this area may prove to be a key tool that business and human rights advocates use to hold corporations accountable for its abuses.

Volume 18.2

The Dollar Dilemma: Hegemony, Control, and the Dollar’s International Role

John Crawford

The U.S. dollar serves both as the domestic currency of the United States and as the dominant international currency for trade, settlement, and reserve purposes. The dollar’s international status provides significant benefits for the United States, but one aspect of the global dollar system as it currently operates is inherently destabilizing: offshore entities, outside the ambit of U.S. supervision and regulation, routinely issue short-term dollar-denominated liabilities—“money claims”—in ways that make them vulnerable to runs and panics. I argue in this article that there are compelling reasons for U.S. monetary authorities to try to reassert control over this activity, but that there are practical limits to their ability to do so if the dollar is to maintain its role as the dominant international currency. The trade-offs involved in balancing dollar dominance against control and stability can be managed but not entirely resolved, creating a dilemma for U.S. monetary policy. This article provides a comprehensive analysis of this dilemma and assesses possible policy reforms in light of the tensions it creates.

No Peeking: Addressing Pretextual Inspection Demands by Competitor-Affiliated Shareholders

Lynn Bai and Sean Meyer

This article exposes how private Delaware companies are vulnerable to pretextual inspections in the name of valuation by shareholders who are affiliated with competitors. The Delaware Court of Chancery’s 2020 decision in Woods v. Sahara Enterprises, Inc., which deviated from established law by switching the initial burden of proof of the shareholder’s motive to the target company, exacerbated this vulnerability. This article argues for reversing that decision and proposes changes in multiple areas of law to help companies fend off prying competitor-shareholders who abuse statutory inspection rights for unfair advantages in competition.

Are Employee Non-Compete Agreements Coercive? Why the FTC’s Wrong Answer Disqualifies It from Rulemaking

Alan J. Meese

The Federal Trade Commission recently proposed a rule banning nearly all employee noncompete agreement (“NCAs”) as unfair methods of competition under Section 5 of the Federal Trade Commission Act. The proposed rule reflects two complementary pillars of an aggressive new enforcement agenda championed by Commission Chair Lina Khan, a leading voice in the Neo-Brandeisian antitrust movement. First, such a rule depends on the assumption, rejected by most prior Commissions, that the Act empowers the Commission to issue legislative rules. Proceeding by rulemaking is essential, the Commission has said, to fight a “hyperconcentrated economy” that injures employees and consumers alike. Second, the content of the rule reflects the Commission’s repudiation of consumer welfare and the Sherman Act’s Rule of Reason as guides to implementing Section 5.

Affected parties will no doubt challenge the Commission’s assertion of authority to issue legislative rules. This article assumes for the sake of argument that the Commission possesses the authority to issue such rules enforcing Section 5. Still, prudence can counsel that an agency refrain from issuing rules before it has fully educated itself about the nature of the economic phenomena it hopes to regulate. Such prudence seems particularly appropriate when the Commission has very recently adopted an entirely new substantive standard governing such conduct. Deferring a rulemaking does not mean inaction. The Commission could develop competition policy regarding NCAs the old-fashioned way, investigating and challenging such agreements on a case-by-case basis.

The Commission rejected these prudential concerns and proceeded to ban nearly all NCAs, assuring the public that it had educated itself sufficiently about the origin and impact of NCAs to conduct a global assessment of such agreements. The Notice of Proposed Rulemaking (“NPRM”) offered three rationales for the proposed rule, drawn from a late 2022 Statement of Section 5 Enforcement Policy. First, the Commission opined that NCAs are “restrictive” because they prevent employees from selling their labor to other employers or starting their own business in competition with their employer. Second, NCAs result from procedural coercion, because employers use a “particularly acute bargaining advantage” to impose such agreements. Third, NCAs are substantively coercive, because they burden the employee’s right to quit and pursue a more lucrative opportunity.

The first rationale applied to all NCAs. The second and third applied to all NCAs except those binding senior executives. Such executives, the Commission said, bargain for such agreements with the assistance of counsel and presumably receive higher salary and/or more generous severance in return for entering such NCAs. Because NCAs also have a “negative impact on competitive conditions,” the NPRM also concluded that they are presumptively unfair methods of competition. The Commission conceded that NCAs can create cognizable benefits. Nonetheless, the Commission concluded that such benefits do not justify NCAs, for two reasons. First, less restrictive means can “reasonably achieve” such benefits. Second, such benefits do not exceed the harms that NCAs produce.

The Commission also rejected the alternative remedy of mandatory precontractual disclosure of NCAs for two interrelated reasons. First, such disclosure would not prevent employers from using overwhelming bargaining power to impose such restraints. Second, disclosure would not alter the number or scope of NCAs and thus would not reduce their aggregate negative economic impact. The procedural coercion rationale played an outsized role in the Commission’s Section 5 analysis, informing the findings that NCAs are also “restrictive” and substantively coercive. Moreover, the outsized emphasis on procedural coercion dovetailed nicely with the Neo-Brandeisian claim that ordinary Americans are routinely helpless before large concentrations of private economic power. Indeed, when the Commission released the NPRM, Chair Khan separately tweeted that NCAs reduced core economic liberties.

Still, the Commission offered no definition of “coercion” or explanation of how to determine whether employers have used coercion to impose NCAs on employees. Instead, the Commission articulated several subsidiary determinations regarding the characteristics of employers and employees that, taken together, established that employers always possess and use an acutely overwhelming bargaining advantage to impose nonexecutive NCAs. Thus, the Commission emphasized that labor market power is widespread, due in part to labor market concentration, most employees are unaware of NCAs before they enter such agreements, NCAs generally appear in standard form contracts, employees rarely bargain over such agreements, most employees live paycheck-to-paycheck and thus have no choice but to accept NCAs, and individuals negotiating over terms of employment discount or ignore the possibility that they will depart from the job they are about to accept and thus downplay the potential impact of an NCA on their future employment autonomy.

This article contends that the Commission’s procedural coercion rationale for condemning nonexecutive NCAs does not withstand analysis. In particular, the Commission’s various subsidiary determinations that support the procedural coercion rationale have no basis in the evidence before the Commission, contradict such evidence and/or disregard modern economic theory regarding contract formation. For instance, a recent study by two Department of Labor economists finds that the average Herfindahl-Hirschman Index in American labor markets is 333, the equivalent of thirty equally-sized firms, each with a 3.33 percent market share, competing for labor in the same market. A previous version of the study was published on the Department of Labor’s website several months before the Commission issued the proposed rule. The NPRM offers no contrary evidence regarding the proportion of labor markets that are concentrated. “Hyperconcentration of labor markets” is apparently a myth.

Moreover, the NPRM ignores record evidence that sixty-one percent of employees know of NCAs before they accept the offer of employment. The NPRM’s failure to address these data is particularly strange, insofar as the NPRM cites the very same page of the academic article where these data appear three different times for other propositions. The Commission also erred when it assumed that employers with labor market power will use such power coercively to impose even beneficial NCAs. This assumption would have made perfect sense in 1965. However, since the 1980s, scholars practicing Transaction Cost Economics have explained how firms with market power, including labor market power, will not use that power to impose beneficial nonstandard agreements, including NCAs. The Commission was apparently unaware of this literature.

Nor does the lack of individualized bargaining and reliance on form contracts suggest that employers use power coercively to impose NCAs. Form contracts often arise in competitive markets and reduce transaction costs. Background rules governing contract formation, robust state court review of NCAs and exit by potential employees can constrain employers’ ability to obtain unreasonable provisions and induce employers to pay premium wages to compensate employees for agreeing to NCAs. These considerations may explain why a majority of employees who had advanced knowledge of NCAs considered the agreements reasonable, a finding the NPRM ignores.

Nor does it matter that most employees work paycheck-to-paycheck. The Commission ignored the possibility that such individuals may be employed when seeking a new job, bargain from a position of relative security and can thus “walk away” from onerous NCAs. The Commission also ignored economic literature establishing that the presence of some such individuals in a labor market can ensure that employers offer reasonable terms to all potential employees, including unemployed job seekers.

Refutation of the procedural coercion rationale for banning nonexecutive NCAs requires reconsideration of the other two rationales as well. For instance, nonexecutive NCAs are the result of voluntary integration and thus not procedurally coercive or substantively coercive, either. Moreover, because some nonexecutive NCAs are voluntary, the Commission must abandon its erroneous assumption that the beneficial impacts of NCAs necessarily coexist with coercive harms. Proper assessment of business justifications requires the Commission to ascertain the proportion of NCAs that constitute voluntary integration, revise downward its estimate of coercive harms and reassess NCAs’ relative harms and benefits. This revision could result in a determination that NCAs’ benefits in fact exceed their harms. Finally, recognition that beneficial NCAs are the result of voluntary integration requires the Commission to reconsider the mandatory disclosure remedy, which the Commission rejected based on the erroneous belief that employers use bargaining power to impose even fully-disclosed and beneficial NCAs. Such reconsideration could of course lead to revising the scope of the proposed ban or rejection of any ban.

The Commission may well be entirely capable of assessing the global impact of NCAs on economic variables such as price, output, and wages. However, the Commission rejected such a rule of reason approach in favor of a standard that turns in part on the process of contract formation. Thus, the Commission necessarily took on the task of gathering information regarding the process of forming NCAs and of assessing that data in light of applicable economic theory. The Commission’s demonstrably poor execution of this task reveals that it lacks the capacity to conduct a generalized assessment of NCAs under a governing standard that treats procedural coercion as legally significant.

Because it lacks the capacity to assess the process of forming nonexecutive NCAs, the Commission should withdraw the NPRM and start over. There are two alternative paths the Commission may take to develop well-considered competition policy governing NCAs. First, the Commission could revert to the rule of reason approach it rejected in 2021. The Commission could draw upon its considerable study of the impact of NCAs on wages, prices and employee training and promulgate a rule that bans those agreements the Commission believes produce net harm, after reconsidering regulatory alternatives such as mandatory disclosure.

Second, the Commission could continue to embrace its new Section 5 standard but take an “adjudication only” approach to implementation. The Commission could simultaneously take other steps through various forms of public engagement to educate itself about contract formation in general and the formation of NCAs in particular. The Commission could build on data it has to this point ignored regarding various attributes of employers, employees and labor markets more generally. Adjudication and self-education could be mutually reinforcing. Self-education could inform the Commission’s determination of which NCAs to challenge, while information generated in adjudication could improve the Commission’s knowledge base about NCAs. Ultimately this two-track approach could generate sufficient information to justify a well-considered rule governing NCAs.

Volume 18.3

Every Billionaire Is a Policy Failure

Ann M. Lipton

2022 Twitter Shutdown Rumors / #RIPTwitter - Hello, I Wish To Register a Complaint, Know Your Meme, https://knowyourmeme.com/photos/2483004-2022-twitter-shutdown-rumors-riptwitter.

Order-by-Order Competition as a Regulatory Restraint on Off-Exchange Market Making: Its Historical Path and Future Outlook

Stanislav Dolgopolov

This Article looks at various regulatory approaches to order-by-order competition, which effectively serves as a regulatory restraint on the business model of off-exchange market making, as reflected in the past, present, and potential future. More specifically, this Article describes the earlier considerations of regulatory changes to enhance order-by-order competition, analyzes models of competition in the context of the current market structure and the key role played by off-exchange market makers, and assesses the approach recently proposed by the regulators, including several measures that supplement or interact with the stated goal of order-by-order competition. The Article concludes by considering the pace of regulatory change in light of the underlying complexity, challenges, and tradeoffs.

Volume 17

Volume 17.1

Everything I Know About the Bond Market I Learned from Litwin v. Allen

Richard A. Booth

This essay focuses on the classic 1940 case Litwin v. Allen, 25 N.Y.S.2d 667 (N.Y. Sup. Ct. 1940), in which the court ruled that directors and officers of a bank were liable for losses suffered by the bank from a transaction in which the bank bought a bond at a discounted price subject to an option permitting the seller to buy it back at the same price (up to) six months later. The price of the bond fell dramatically during the option period, the seller declined to buy it back, and the bank was left with the loss. The court ruled that the defendant directors and officers were not protected by the business judgment rule—which precludes liability for losses from good faith business decisions—because the deal entailed assuming an extra risk of loss without the prospect of extra return. In effect, it was a no-win bet in which the bank would break even at best. Thus, Litwin articulates one way that corporate management (and indeed any fiduciary) can be held accountable for losses suffered by the corporation (or principal) other than because of a disabling conflict of interest.

Although the Litwin court states the rule correctly, it is wrong on the facts. What the court fails to see is that the bank did bargain for extra return because it bought the bond at a discount from market value. Moreover, the bank could have hedged against the risk of loss and may indeed have been hedged by virtue of diversification. But to understand why the result in Litwin is wrong, one must understand the fundamentals of time value of money, going concern value, option pricing, portfolio theory, and many other topics typically covered in a class on corporate finance. Conversely, Litwin can be seen as a short course on the legal aspects of corporate finance and as such is an excellent teaching case. Despite being wrong on the facts, Litwin remains good law and continues to be followed by the courts, most notably by the Second Circuit in Joy v. North, 692 F.2d 880 (2d Cir. 1982), another seminal decision authored in 1982 by the late Judge (and Professor) Ralph Winter. Like Litwin, Winter's opinion in Joy can serve as a clinic in corporation law as seen at a time when legal scholars were just beginning to recognize the relevance and power of financial concepts and when new transactions and governance issues challenged old ways of thinking. This essay focuses on Litwin itself and the flaws in the reasoning thereof. The sequel will focus on the implications of the Litwin rule in connection with the interpretation of the business judgment rule as articulated in Joy by Judge Winter.

Mutual Fund “Clean Shares”: The Future or Part of It?

Michael B. Weiner

A mutual fund generally offers separate share classes to tailor its distribution fees to meet the needs of different investors. In this way, share classes are like trim levels of a car, where the car’s core attributes stay the same, but the trim levels allow consumers to pick the features and cost that best suit them. The world of mutual fund share classes received a jolt of change with the creation of so-called “clean shares,” which turn upside down how investors pay for fund distribution. After discussing the regulatory and commercial framework for share classes, this article considers whether clean shares carry through on their promise to improve fee transparency and lower investor costs. Relying on quantitative analysis, the article concludes that while clean shares are a worthy addition to the share class milieu, they are not a death knell for the status quo. 

Facebook’s Corporate Law Paradox

Abby Lemert

In response to the digital harms created by Facebook’s platforms, lawmakers, the media, and academics repeatedly demand that the company stop putting “profits before people.” But these commentators have consistently overlooked the ways in which Delaware corporate law disincentives and even prohibits Facebook’s directors from prioritizing the public interest. 

Because Facebook experiences the majority of the harms it creates as negative externalities, Delaware’s unflinching commitment to shareholder primacy prevents Facebook’s directors from making unprofitable decisions to redress those harms. Even Facebook’s attempt to delegate decision-making authority to the independent Oversight Board verges on an unlawful abdication of corporate director fiduciary duties. Facebook’s experience casts doubt on the prospects for effective corporate self-regulation of content moderation, and more broadly, on the ability of existing corporate law to incentivize or even allow social media companies to meaningfully redress digital harms. 

Volume 17.2

Progressive Corporate Governance Under Social Capitalism: Do the Right Thing or Share the Wealth?

Amy Deen Westbrook and David A. Westbrook

This Article expands the idea of progressive corporate governance beyond the limitations entailed in the traditional debate over corporate purpose: should firms be operated for Shareholder Wealth Maximization (SWM) or for broader goods, today called Environmental, Social, and Governance (ESG) goals? In one form or another, “shareholder capitalists,” have debated with “stakeholder capitalists,” for over a century. In general, stakeholder capitalists have presented their conception of the firm’s purpose as “progressive.” This Article complicates that claim by arguing that both SWM and ESG may be understood as progressive, albeit under different understandings of the word “progressive,” different assumptions about the practicalities of corporate governance, and different understandings of today’s economy. 

The circumstances of the debate over corporate purpose have changed. The contemporary U.S. economy is extremely financialized: shocks such as the Global Financial Crisis and the COVID-19 pandemic have demonstrated that institutions and individuals depend on the smooth functioning of the capital markets. Neither classical economics, on which shareholder capitalism relies, nor the tradition of social criticism, on which stakeholder capitalism depends, adequately frame this economy. Our situation is better understood in terms of “social capitalism.” Reversing Henry Sumner Maine’s famous dictum that progress is the movement from status to contract, human welfare in the United States is determined largely by station, in short, property. 

Under social capitalism, a firm might be progressive in the way urged by stakeholder capitalists, by “doing the right thing.” Governance of such a firm should heed its active, influential shareholders, focusing on how the business operates. Alternatively, a firm might be progressive by “spreading the wealth” and democratizing participation in capital markets, both by individuals and institutions. Governance of such a firm practically requires delegation of control over assets to its board of directors and other fiduciaries, focusing on meeting society’s claims to economic output. 

The question of what constitutes progressive corporate governance thus hinges on whether “progressive” is understood primarily in terms of operations and relatively few active shareholders, or in terms of wealth distribution and perforce delegated governance. In the age of social capitalism, the answer is likely both. 

America’s First Corporate Person: The Bank of the United States, 1789-1812

Jared S. Berkowitz

This Article analyzes the centrality of legal personhood within the early American conception of the corporation. At the turn of the 19th century, Congress fiercely debated whether the General Government had the power to charter a national banking corporation, the Bank of the United States (BUS). Legal personhood, the judicial fiction that enables companies to buy, sell, and sue like ordinary individuals, was at the core of this ideological debate. Speeches supporting and opposing the BUS revealed how the corporation was conceptualized within emerging American law. Virginia’s James Madison, for example, spoke of the “civil character” and “civil rights” of the corporation. Similarly, New York’s John Lawrence warned of the corporation’s “individuality” and “irresponsibility.” Outside of Congress, legal controversies between individual states and the BUS tested the boundaries of federalism and provided judges with an opportunity to craft an American law of corporations—one that personified the institution while supporting an emerging capitalist economy. This Article reveals how legal personhood was leveraged in the early 19th century and how that history can help us navigate the challenges corporate personhood poses in our contemporary political and economic environment. 

ESG’s Democratic Deficit: Why Corporate Governance Cannot Protect Stakeholders

John C. Friess

The environmental, social, and governance (ESG) movement has garnered significant attention over the past several years. This movement generally purports to focus on addressing the interests of all corporate stakeholders, such as employees, customers, the environment and the public at-large, rather than focusing solely on shareholder value. To accomplish this goal, proponents of ESG contend that corporate governance provides the best mechanism. However, this Note argues that such an approach would be detrimental. Corporate governance is a body of law and standards were created first and foremost to provide protections for shareholders vis-à-vis corporate managers; whereas, the government created distinct bodies of law to provide protection for other stakeholder groups vis-à-vis the corporation. In attempting to channel safeguards for every stakeholder group through a body of law intended to address only one such relationship, proponents of ESG are enabling a system of “self-regulation” for corporations that is both unproductive and undemocratic. Instead of outsourcing such a fundamental responsibility to shareholders and corporate boards, the government should step in to directly address the growing set of ESG issues that demand immediate attention. 

Volume 17.3

The Evolving Geography of the American Antitrust Mind

Sungjoon Cho

The American antitrust regime has long been accused of countenancing the unprecedented monopolization of high-tech industries, including Facebook, Amazon, Apple, Netflix and Google. Such regulatory omission was thrown into sharp relief against the original antitrust history in which industrial behemoths, such as Standard Oil, were broken up. Yet, with a series of federal recruits of neo-Brandeisians, the Biden administration attempted to revamp the American antitrust regime. Why was the American antitrust regime passionately pro-industry in past administrations, to the extent that the very rationale of antitrust was in doubt? Also, what caused the sudden paradigm shift in the new administration? In an effort to answer these vexed questions, this Article employs a new concept of “regulatory mind,” which can be broadly defined as a basic set of assumptions, beliefs, and values that constitute a particular regulatory ideology. This Article advances a dynamic investigation of the American antitrust mind, which can elucidate the nature and identity of the American antitrust regime. First, this Article maintains that Chicago School’s market fundamentalism heavily influenced the American antitrust mind. Second, this Article seeks to corroborate such observation by tracing the dynamic shift of antitrust jurisprudence surrounding vertical price restraint (VPR). The main contribution of this Article is to reveal granular details that punctuate the analytical veil of clichéd images of American antitrust law and offer fresh insights informed by a sociological methodology of process-tracing.

SEC “Authority” and the “Major Questions” Doctrine

Robert A. Robertson and Kimberley Church

When West Virginia v. EPA appeared on the Supreme Court’s docket, the Court was set to determine the authority of the U.S. Environmental Protection Agency (“EPA”) to reduce the impact of climate change. However, the Court took the opportunity to impose a significant judicial restraint on all federal agency rulemakings. No doubt, the U.S. Securities and Exchange Commission (“SEC”) and other agencies are reviewing their recently adopted rules and proposed regulatory agendas to conform to the Court’s first comprehensive application of the “major questions” doctrine. The EPA decision will affect a host of SEC regulatory hot-button areas, such as ESG matters, corporate board diversity and cryptocurrency regulations.

Justice Roberts, writing for the Court’s majority, explained the major questions doctrine as one that should apply to “extraordinary cases” of administrative acts, where the history and the breadth of the authority asserted by the agency, and the economic and political significance of that assertion, provide “a reason to hesitate” before concluding that Congress meant to confer such authority. In such extraordinary cases, the agency instead must point to “clear congressional authorization” for the power it claims.

This Article examines the major questions doctrine’s impact on the SEC’s future regulatory rulemaking under the federal securities laws. In doing so, the Article will engage in a case study using the SEC’s recently proposed rules that would require climate-related risk disclosures to consider how the Court likely would evaluate these and other SEC regulations. The insights learned should portend a refined approach to the Commission’s regulatory actions.

U.S. Corporate Accountability in the ESG Era

Gilda Sophie Prestipino

The focus of corporate governance on Environmental, Social and Governance (“ESG”) issues has grown exponentially in recent years. The phenomenon has a global nature, and the COVID-19 pandemic has accelerated the demand for corporate leaders to take ESG seriously. In the United States, ESG-related proxy proposals and new rules on board diversity adopted by Nasdaq illustrate this change in the focus of corporate governance away from narrow attention to shareholder wealth maximization.

While practitioners and scholars have already analyzed in great detail both the practical and theoretical aspects of this paradigm shift, it is unclear whether the U.S. legal system currently provides the optimal framework for the complete realization of ESG goals. This article explores the potential for effective integration of ESG objectives into U.S. corporate law, bankruptcy practices, and securities regulation. The article suggests that, ultimately, what underlies the focus on ESG objectives is rising demand for greater accountability of corporations and their leaders, and that reputational incentives and activist campaigns have higher potential than the existing legal infrastructure.

Volume 16

Volume 16.1

Deconstructing Scienter

Richard A. Booth

This article traces the evolution of scienter as applied under Rule 10b-5 primarily by analysis of SCOTUS decisions addressing the concept. It contributes to the law and literature by demonstrating the relevance of agency law doctrine, which has been almost entirely ignored by other scholarship on the subject of scienter.

Pay-for-Delay, Here to Stay? Surviving Summary Judgement Post-Actavis

Patrick M. Kennedy

This paper considers the continuing viability of “pay-for-delay” antitrust claims in the wake of the Supreme Court's landmark decision in FTC v. Actavis.1 Although the Court in Actavis suggested that settlements to impermissibly extend the life of a patent could state a claim under antitrust law, Justice Breyer's opinion for the majority leaves a number of important doctrinal components up in the air. In particular, who bears the burden of proving a settlement is too “large” and “unjustified” remains the subject of fierce litigation in the lower courts. This paper wades into these debates, concluding that the plaintiff bears the burden of proving a payment is large, but that the defendant is properly tasked with showing a payment has an innocent explanation, not the plaintiff. Further, I reject the claim that proving fair market value is an intrinsic component of the plaintiff's burden to show reverse settlements are “large and unexplained.” Alternatively, I argue that the best solution for companies facing significant uncertainty about the future doctrinal direction for reverse payment cases should instead create a patent invalidity insurance market.

Federalism, Free Competition, and Sherman Act Preemption of State Restraints

Alan J. Meese

This article demonstrates that federalism and state sovereignty do not rebut the strong case for Sherman Act preemption of state-created restraints. Such preemption would be a garden-variety exercise of Congress's commerce power. Moreover, Sherman Act preemption would not interfere with any constitutionally recognized attribute of state sovereignty.

Turning to canons of construction, the article concludes that such preemption is so plainly constitutional that the avoidance canon is inapposite. The federal-state balance and anti-preemption canons do protect traditional state regulatory spheres from inadvertent national intrusion. Neither supports Parker itself, which sustained a regime that directly burdened interstate commerce and injured out-of-state consumers. Application of these canons instead reveals that the Court's invocation of federalism is selective at best. Indeed, the Court's rejection of the federal-state balance canon and resulting application of the Act to local private restraints that produce no interstate harm created the very conflict between the Sherman Act and local regulation that the state action doctrine purports to resolve.

How Robinhood Has Revolutionized Online Trading and Dramatically Upended the Traditional Model for Payment for Order Flow (PFOF)

Paul J. Ingrassia

The once unglamorous practice of Payment for Order Flow (“PFOF”) received a new lease on life in the aftermath of the Robinhood-GameStop short squeeze of January 2021. In a special study from 2000, the SEC defined PFOF for options trading as “a method of transferring some of the trading profits from market making to the brokers that route customer orders to specialists for execution.” Boiled down to its essence, PFOF is the commission the broker-dealer earns for routing certain information about a trade made by its client to a routing agency or “market maker” (also called a “middleman”), which then finalizes the terms of the deal with the stock exchange. While the SEC definition applies to stock options specifically, order flow is a controversial practice for both options and non-derivative securities, such as stocks. Both types are relevant to Robinhood. To avoid confusion, I want to make clear from the outset that the SEC definition for options roughly approximates the definition of PFOF for stocks, bonds, and other securities. The reader should likewise note that when I refer to PFOF throughout this note I refer to its use across all sorts of asset classes, not simply options trades.

Technically speaking, when a retail trader buys a security on a platform provided by a broker-dealer (i.e., Robinhood Financial LLC), that security is often (although not always) owned by the market maker (i.e., Citadel LLC), which lends a defined inventory of securities to the brokerage firm. The brokerage firm then distributes customer pricing information about individual trades on the firms' books and records. Market makers are needed--at least for the time being--because most financial institutions lack the operational capabilities to manage a significant volume of securities contracts all on their own. While some of the larger and more sophisticated brokerages manage their own stock inventory, the financial markets have adopted a model that for the most part segregates the duties of broker-dealer and market maker.

Market makers also play a critical role in maintaining liquidity in financial markets. Periodically, middlemen will even alter the broker-dealer's inventory requirements to mitigate a perceived danger in the markets, such as what occurred with Citadel in January. I will also discuss in greater depth the market maker's role in Section V. But for now, it is important to note that when I speak of “order flow,” I am referring specifically to the trade flow information routed from a broker-dealer to a market maker.

The method of compensation known as PFOF has been around for decades. However, recent controversies surrounding PFOF's controversial practices, particularly by Robinhood, have underscored the changing ecosystem of private retail trading more generally. Further, new technological innovations have in significant ways democratized and revolutionized the online trading space by making investing more accessible than ever before, especially for less educated and younger traders now using online platforms like Robinhood. All these factors bring new possibilities--as well as potentially unforeseen risks--into the financial industry.

Volume 16.2

A Web of Paradoxes: Empirical Evidence on Online Platform Users and Implications for Competition and Regulation in Digital Markets

Pinar Akman

This article presents and analyses the results of a large-scale empirical study, in which over 11,000 consumers from ten countries in five continents were surveyed about their use, perceptions, and understanding of online platform services. To the author's knowledge, this is the first cross-continental, multi-platform empirical study of users of online platform services of its kind. Amongst others, the study probed platform users about their multi-homing and switching behavior; engagement with defaults; perceptions of quality, choice, and well-being; attitudes towards targeted advertising; understanding of basic platform operations and business models; and valuations of “free” platform services. The empirical evidence from the consumer demand side of some of the most popular multi-sided platforms reveals a web of paradoxes that needs to be navigated by policymakers and legislatures to reach evidence-led solutions for better-functioning and more competitive digital markets. This article contributes to literature and policy by, first, providing a multitude of novel empirical findings and, second, analyzing those findings and their policy implications, particularly regarding competition and regulation in digital markets. These contributions can inform policies, regulation, and enforcement choices in digital markets that involve services used daily by billions of consumers and are subjected to intense scrutiny, globally.

Losing the Forest for the Trees: On the Loss of Economic Efficiency and Equity in Federal Price-fixing Class Actions

Martin A. Asher, Gregory K. Arenson, and Russell L. Lamb

This article focuses on the misuse of econometrics in asserting that certain potential individual class members or groups of class members were not “impacted” (that is, adversely affected in any degree) as a result of alleged horizontal price fixing and the effect such arguments have had on class-certification law in the context of federal horizontal price-fixing cases. Econometric methods have proven to be powerful tools relevant to both proof of injury-in-fact and the quantification of damages (typically overcharges) in horizontal price-fixing disputes. However, defendants have sought to alter the law by some false claims emanating from econometrics. If defendants' claims were accepted, the result would be to erode both economic efficiency and equity--permitting price fixers to escape liability and retain their ill-gotten gains. Defendants' argument often reduces to a claim that it would be unfair to the defendants to include purportedly uninjured claimants in a certified class, even if the alternative is that the defendants would avoid liability for undisputed damages suffered by plaintiffs. This argument is even more perverse because the econometric methods employed yield the correct measure of aggregate damages (overcharges), while defendants' arguments, even taken at face value, go only to the distribution of those overcharges among plaintiffs. Hence, the fact that some claimants would receive less than they deserve and some more--though being correct in total--is apparently less fair than to allow the defendant price fixers to retain their cartel profits through denial of class certification and the effective termination of the suit. The courts have not followed, and should not follow, this path through the trees and lose sight of the forest.

Material Adverse Effect (Mae) Clauses in Canada: What U.S. Counsel Needs to Know

Paul Blyschak

The recent decision in Fairstone v. Duo Bank is an important addition to Canadian “material adverse effect” jurisprudence and, in addition to Canadian caselaw, relies heavily on Delaware precedent. On the face of the decision, Fairstone appears to be either adhering to or adopting such precedent. However, while this is the case in numerous respects, in several other ways Fairstone departs significantly from its Canadian and Delaware counterparts. It also makes these departures without either signaling it is doing so or explaining why it is doing so. The result is several interrelated, unresolved, and problematic issues of which U.S. and Canadian counsel should be aware and take caution. Stated differently, the result is an unusual and uncertain path between Canadian and Delaware MAE caselaw of consequence for all M&A transactions governed by Canadian law. Finally, given that the U.S. is by far the largest source of foreign investment into Canada, this confusion will be of particular interest to U.S. counsel with a cross-border practice.

SPACs and the Present Regulatory Conundrum

Samantha K. Keleher

Much commentary surrounding the SPAC boom focuses on the perceived risks of SPACs and capitalizes on the fear that generates. This commentary, however, largely ignores the great benefits inherent in SPACs. Conversely, of those discussions that espouse the virtues of SPACs, most also ignore the hazards involved in the current regulatory chasm of SPAC oversight. Misaligned incentives, a dearth of disclosure, and a lack of preparedness requirements make SPACs as they stand today potentially precarious for the average, unapprised retail investor. But the structure of SPACs also makes them potentially very valuable for retail and institutional investors alike - they bring accessibility to the markets, they have inherent safeguards in place, and they have the potential to be very lucrative. The risks identified by critics of SPACs can all be rectified with sensible but measured regulation. However, regulators must be mindful of the dual regulatory regime this will create: the SEC requires intensive, thorough disclosure and procedural requirements for the traditional IPO process because this is what it considers necessary for investor protection; however, SPACs require none of that. And importantly, as SPAC usage has exploded in recent years, traditional IPOs have steadily declined. Many attribute this shift to increasingly cumbersome and deterrent regulatory obstacles in place in the traditional IPO process. So, as long as these two methods of going public exist alongside each other, the SBC's regulatory reasoning will remain in conflict with itself. Regulators, therefore, must be aware of this as they consider how to best treat SPACs. They should acknowledge and welcome the benefits SPACs provide to the markets and investors, while bridging the divide they create with the traditional IPO process. This article seeks to address all of those concerns and offers a proposal for how to satisfactorily handle these instruments and their regulation.

Simplified Veil-Piercing

Eva Lilienfeld

Corporate veil-piercing is complicated. Streamlining the doctrine would provide clarity to an area of law complicated by the constitutional boundaries of personal jurisdiction and the fact-intensive nature of substantive veil-piercing This Note proceeds by reviewing two possible outcomes under current veil-piercing doctrine: a broader jurisdictional test or a broader substantive test. It then explains how each situation causes problems for plaintiffs and defendants alike. First, it forces parties to waste judicial resources in applying different veil-piercing tests to answer the same question. Second, it prevents litigants from understanding their legal liabilities and obligations by unnecessarily complicating a case. Finally, the interaction of personal jurisdiction and substantive corporate law triggers issue preclusion and unfairly prevents plaintiffs from re-litigating their claims elsewhere.

This Note argues that courts should instead apply the same test for both jurisdictional and substantive veil-piercing purposes. By using the substantive veil-piercing test for the entire case, corporate defendants can better anticipate their legal liabilities, and plaintiffs can more adequately assess the merits of their claims. Implementing this solution would, without running afoul of procedural due process concerns, increase efficiency, predictability, and just outcomes for plaintiff's in a muddle area of corporate law.

Volume 16.3

Toward Enhanced Corporate Sustainability Disclosure: Making ESG Reporting Serve Investor Needs

Dan Esty and Todd Cort

Interest in metrics that track corporate sustainability performance has risen dramatically in recent years. Driven in part by sustainability-minded investors who want to better align their portfolios with their values and in part by corporations that seek to show how they have folded a focus on sustainability into their business models, the growth of corporate Environmental, Social, and Governance (ESG) reporting has become a topic of focus and concern in the finance world. Notably, in the absence of widely applicable and consistent ESG reporting requirements, those aspiring to make sustainable investments face a dizzying array of corporate ESG disclosures as well as sustainability metrics produced by third-party data firms. And they have come to recognize that the available ESG data are both incomplete and inconsistent--and sometimes even outright misleading. With the demand for firmer foundations for sustainable investing in mind, this article maps the ESG terrain--laying out the critical issues, highlighting the shortcomings of existing ESG reporting, and identifying what investors want in the way of sustainability data. Building on this analysis and a survey undertaken by the Yale Initiative on Sustainable Finance, the Article concludes with a set of recommendations for improved corporate ESG metrics and methodologies.

Code Section 304: A Roadmap, an Updated Analysis, and Policy Considerations

Doron Narotzki and Melanie McCoskey

Code Section 304 requires the reclassification of stock sales between affiliated corporations as dividends. However, for many years, Code Section 304 has not fulfilled the original “anti-avoidance” tax policy that was behind its legislation. This article aims to provide an updated analysis and explanation of the mechanics of Code Section 304 and to provide some insight into the tax planning strategies that utilize Code Section 304 in order to minimize U.S. federal income tax. The article will also demonstrate how these tax avoidance results are still effective post-TCJA. The article will then suggest a potential tax law change to return this code section to its intended anti-abuse status. Finally, the article suggests reconsideration of the tax policy related to dividend distributions.

Rethinking the Financial Stability Oversight Council

Paolo Saguato

New major existential challenges are threatening the U.S. financial system. Climate change, cyber risk, the evolving role of digital assets, and vulnerabilities in nonbank financial intermediation call for prompt collective responses by financial regulators. However, the existing U.S. financial macroprudential regulatory architecture seems not to be up to the task because of “architectural vulnerabilities” that undermine its proper functioning.

The financial Stability Oversight Council (FSOC) is a multiagency authority created by the Dodd-Frank Act to mitigate systemic risk by coordinating the actions of U.S. financial regulators. It was envisioned as a macroprudential authority to stabilize the financial system. FSOC was given the power to designate systemic ally important entities and activities and to trigger a novel back-up regulatory and supervisory authority of the Federal Reserve (Fed), what I call the Regulator of Fast Resort (ROLR) function.

This Article shows that FSOC, in its current structure, is not up to the challenges facing the U.S. financial system. Offering a novel political economy account to its operations and structure, the Article shows that architectural vulnerabilities in the FSOC design exposes it to political cyclicality--which undermines its operations, deprives the markets of a critical watchdog, and compromises the operation of the Fed as ROLR. This Article proposes incrementalistic and marginal policy solutions to this problem. Congress should fix the architectural vulnerabilities of the FSOC by adopting a different leadership structure. Building on the comparative experience of the U.K. and the E.U., the Articles proposes two alternative options: upgrading the current leadership of the Council to a Co-Chair role of the Fed Chair and the Treasury Secretary; or alternatively, creating a new Systemic Risk Council within the Fed as a novel macroprudential authority.

The Impact of Geo-Economic Rivalry on U.S. Economic Governance: Will the United States Incorporate Aspects of China's State-Centric Governance?

Joel Slawotsky

China's corporate governance model emphasizes an extensive governmental role in the construction of economic markets. The paradigm consists of an economic-political syndicate of collaborative actors creating profit but whose critical core mission is to advance state objectives as defined by the ruling authority, the CCP. Economic interests thus serve political interests pursuant to a template of state direction and partnership with the private sector encompassing share ownership; industrial policies; governmental representatives embedded in the private sector; and discipline imposed for failing to comply with syndicate rules. The model has empowered China to narrow the once substantial leads enjoyed by the U.S. with respect to economic, technological, and military power. Although the United States has alleged that China's model is unfair and has endeavored to have China de-emphasize its model and move towards the U.S. model of market-capitalism, these efforts have been unsuccessful. Significantly, competitive pressures and national security interests may force the U.S. to embrace one or more aspects of China's economic model. The impetus for doing so is not merely driven by U.S. governmental concerns over China; indeed, some U.S. business leaders have called for a similar role for the U.S. government in order to successfully compete with the Chinese private-sector, let alone State-linked entities. Whether out of competitive pressures or the allure of success, incorporating aspects of China's model is an increasing possibility with significant potential impacts on U.S. corporate governance. This article discusses the drivers militating toward U.S. incorporation of aspects of China's governance model as well as the potential ramifications on U.S. governance.

Reaching for the Moon: An Analysis of Real-Time Securities Clearing and Settlement in Light of Emerging Blockchain Technologies

Luke Colle

The January 2021 “WallStreetBets” trading fiasco shocked the financial industry. At the congressional hearing that followed, policymakers, hedge fund managers, and market makers agreed that a two-day settlement cycle exposes investors, broker-dealers, and clearinghouses to significant risks that a hypothetical real-time settlement system would not. Commentators noted that blockchain technologies might make such a revolutionary settlement time possible.

This Note responds to the financial system's urgent need and offers an analysis of real-time settlement in light of novel blockchain technologies. In Part I, this Note analyzes the advantages and disadvantages of realtime settlement. In Part II, this Note explains--in layman's terms--how emerging blockchain technologies can mitigate the drawbacks of such incredibly speedy settlement. In Part III, this Note describes how exchanges and clearinghouses have applied blockchain technologies thus far.

Volume 15

Volume 15.1

If Apps Be the Food of the Future, Arbitrate on!: Mobile-Based Ride-Sharing, Transportation Workers, and Interstate Commerce

Tamar Meshel

Mobile-based ride-sharing companies such as Uber and Lyft are increasingly facing lawsuits filed by drivers claiming to be misclassified as independent contractors rather than employees. Uber and Lyft have both attempted to compel their drivers to arbitrate these claims under the Federal Arbitration Act (FAA) pursuant to arbitration clauses they include in their service agreements. In response, the drivers frequently argue that they are not required to arbitrate their claims since they are “transportation workers” who are “engaged in interstate commerce” and thus excluded from the FAA. This article provides a detailed examination of courts' interpretations of this exception from the FAA, and exposes considerable inconsistencies in the jurisprudence. Given the frequency of employment claims made by drivers against mobile-based ride-sharing companies and the implications of holding their arbitration agreements to be unenforceable under the FAA, the article advocates for a uniform interpretation of the Act. It argues that the FAA's text, purpose, and legislative history all suggest that drivers of mobile-based ride-sharing companies are not “transportation workers” who are “engaged in interstate commerce” within the meaning of the FAA and therefore should not be excluded from its purview.

International Tax Planning for Domestic Multinational Corporations: Optimizing Effective Tax Rates by Turning Sticks into Snakes and Implementing Other Strategies

Cody Wilson

The Tax Cuts and Jobs Act overhauled the U.S. international tax regime and drastically changed the mechanisms, known as favorable permanent differences, for optimizing a domestic multinational corporation's Effective Tax Rate (ETR) as measured by financial accounting. This constitutes a notable change because optimizing the ETR maximizes two indicators that investors widely use to gauge a corporation's profitability: net income and earnings per share.

This Article provides guidance to tax lawyers tasked with optimizing a multinational corporation's ETR. They must avoid the base erosion anti-abuse tax (the BEAT), utilize foreign-derived intangible income (FDII), and manage global intangible low-taxed income (GILTI) by affirmatively planning into the Subpart F regime at times. Interestingly, by design, the GILTI and Subpart F regimes were to serve as anti-deferral sticks that beat on the heads of taxpayers, but together, they can metamorphose into snakes that bite the Commissioner on the hind part by helping to minimize a multinational corporation's U.S. tax expense and thus optimize its ETR.

Spread the Fed: Distributed Central Banking in Pandemic and beyond

Robert Hockett

This article proposes both an interpretation of and an institutional optimization plan for successors to the broad array of new Fed Liquidity Facilities introduced in response to the novel coronavirus pandemic of 2020. These represented an attempt by our nation's central bank to fund concerted state and municipal action as if it were federal action--a mode of action gone AWOL during the Trump administration. In one sense, this necessity was regrettable: over 350,000 Americans have died of COVID-19. In another sense, however, the conundrum is simply the latest iteration of our republic's perennial ambivalence about financial and political federalism alike. This accordingly yields an opportunity: to re-distribute and revive our once-distributed Fed's functionality across its more locally attentive subsidiaries, as originally envisaged in the Federal Reserve Act of 1913.

Volume 15.2

Exchange-Traded Confusion: How Industry Practices Undermine Product Comparisons in Exchange Traded Funds

Ryan Clements

Despite their incredible popularity and importance to modern capital markets, exchange traded funds (ETFs) are extremely difficult to compare side-by-side. Investors who successfully navigate the initial challenges of product choice overload and opaque index construction methodology, soon encounter a wide array of discretionary operational, management, marketing and financial practices of ETF sponsors that combine to undermine simple product and performance comparisons. This dilemma is compounded by disclosure effectiveness challenges, given investor cognitive limitations and behavioral tendencies. This article is the first scholarly work, amongst a growing body of ETF studies, to illustrate why accurate “apples to apples” product comparisons in ETFs are so challenging (at times even impossible) to perform. This article presents a variety of ETF case studies to demonstrate this challenge, including recent performance instabilities during the coronavirus pandemic.

This article advocates for continued positive momentum around investor-focused reforms in ETFs, building on encouraging steps undertaken by the U.S. Securities & Exchange Commission in its recent “Rule 6c-11” under the Investment Company Act of 1940. Finally, this article makes several recommendations to improve ETF product comparisons, including standardizing website formats and layouts for information presentation, uniform calculation methodologies of key ETF variables, an ETF naming convention, and standard terms in sustainable investing. ETF investors would also greatly benefit from a systematized and structured electronic reporting mechanism whereby standardized data is provided by ETF sponsors to a centrally controlled public repository. Additional studies are warranted on strategic ETF disclosure ordering digital enhancement, and added contextual discussion around critical concepts like arbitrage and index composition methodology. The ETF “model portfolio” industry is also an emerging concern that should be assessed, and this article provides suggestions to reduce informational opacity and improve comparative assessments.

Bail-outs and Bail-ins Are Better than Bankruptcy: A Comparative Assessment of Public Policy Responses to COVID-19 Distress

Kristin van Zwieten, Horst Eidenmüller and Oren Sussman

COVID-19 has severely disrupted the conduct of business around the globe. In jurisdictions that impose one or more “lockdowns,” multiple sectors of the real economy must endure prolonged periods of reduced trading or even total shutdowns. The associated revenue losses will push many businesses into bankruptcy. No public policy response can recover these losses. States can, however, act to reduce the amplification of the shock by the manner in which they treat the cohort of newly bankrupt businesses. In jurisdictions where a well-functioning reorganisation procedure can produce value-maximising outcomes in normal conditions, the temptation may be to subject this cohort to such procedures. This temptation should be resisted, not only because of the (significant) costs of these procedures, or because of concerns about institutional capacity to treat a high volume of cases, but also because such procedures are likely to be a poor “fit” for the treatment of COVID-19 distress. The more attractive routes to relief are bail-ins (one-time orders to creditors or counterparties, or some class thereof, to forgive), bail-outs (offers to assume the debtor's liabilities, or a class thereof, or some combination of the two. In this paper, we explain why a public policy response is necessary to mitigate the amplification of the shock caused by trading shut-downs, and we compare treatment by the prevailing bankruptcy law with treatment by bail-ins or bail-outs along a range of dimensions. We conclude by suggesting principles to help guide the choice between bail-ins and bailouts, and the design of either form of intervention. These principles should offer a useful starting point for thinking about the design and delivery of novel forms of relief to debtors distressed by COVID-19-related revenue losses.

The U.S. Supreme Court in Kaestner: Deciphering the Constitutionally Required Minimum Contacts Necessary for State Taxation of Trust Income

Beckett G. Cantley and Geoffrey C. Dietrich

As far back as 1929, several states have sought to broaden their tax base by expanding taxation to out-of-state trusts that have in-state beneficiaries, even when the beneficiaries possess only a contingent interest in the trust's assets. On June 21, 2019, the U.S. Supreme Court confronted the constitutionality of this trust tax practice in North Carolina Dep't of Revenue v. Kimberley Rice Kaestner 1992 Family Trust (“Kaestner Trust”). In Kaestner Trust, the Supreme Court issued a narrow decision in favor of the Trust, basing its opinion on a compilation of landmark constitutional law and civil procedure cases. Specifically, the Court ruled that the domicile of a contingent beneficiary on its own does not constitute sufficient “minimum contacts” between a trust and a jurisdiction for tax purposes, and thus the North Carolina statute violated the Due Process Clause of the U.S. Constitution.

Every jurisdiction has its own method of defining the minimum contacts necessary to bring a trust into its taxation orbit. In light of the Court's decision, other state statutes that impose a fiduciary income tax based on weak connections may face constitutional scrutiny in the near future, including tax regimes containing “throwback” rules, “one-dollar” rules, and testamentary trust residency standards that rely indefinitely on the domicile of a testator. The main purpose of this article is to understand the Kaestner Trust decision, discuss how the impacted states have adjusted, and identify any statutes peripheral to the case that may face constitutional inquiry in the future.

The introduction to this article provides the foundation for understanding state trust taxation regimes and frames the controversy of multi-state taxation. Tart II explains the facts within Kaestner Trust and analysis used by the Supreme Court in rendering the North Carolina statute unconstitutional. It also discusses how the North Carolina trust statute has been impacted. Tart III identifies the other states, besides North Carolina, directly impacted by the Kaestner Trust decision and how these states have responded to the case. Tart TV analyzes how the decision might promote further inquiry into the constitutionality of statutes that lie on the margins of Kaestner Trust. Finally, the article considers estate planning and trust drafting opportunities created by the case and concludes by briefly summarizing the significance of Kaestner Trust.

Disintermediation of the IPO Industry: The Viability of Auctioned IPO as an Alternative under the Changing Underwriting Paradigm

Iris Tian

The firm commitment offering method has been dominating the world's initial public offering stage for over three decades. Although popular, it is increasingly associated with issues such as high offering expenses, severe underpricing, prevalent agency costs, and inegalitarian access to shares. This article seeks to demonstrate that the conventional reputation-based underwriting paradigm is shifting and lays out baselines for comparison with the more efficient, equitable, and inexpensive auctioned offering. It concludes that, based on both the merits of the auctioned offering method and external changes in the underwriting industry, the auctioned offering can supplement, and largely supersede, the traditional firm commitment offering.

Volume 15.3

Constitutional Limits on Public Pension Reform: New Directions in Law and Legal Reasoning

T. Leigh Anenson, Linda L. Barkacs and Jennifer K. Gershberg

Millions of Americans are at risk of losing their pensions. Faced with alarming actuarial deficits, state and local legislatures are enacting comprehensive reforms to avoid insolvency. Government employees, however, are challenging these reforms under the Contract Clause. This Article collects the most important constitutional cases on public pension reform over the last six years. It adds a comprehensive study of recent state and federal court practice to the existing literature, including key U.S. Supreme Court decisions that have been overlooked. This Article takes stock of forty-eight decisions across twenty-two states, more than a dozen of which reached resolution in the highest courts. It offers a critical examination of key developments, an assessment of emerging challenges, and a new sustained account of the reforms that have succeeded and the grounds for that success. It also provides an appendix and various diagrams documenting our analysis and conclusions.

The most surprising finding is that an overwhelming majority of barriers to pension reform are judge-made, meaning that changing case outcomes would not require a constitutional amendment. Another discovery is that reforms routinely have been upheld even in those states in which existing doctrine is more protective of employee pensions. These results have practical implications because they suggest that governments can expand the scope of reforms. Clarifying the reasons for and reasoning underlying these decisions also has jurisprudential significance. Courts in a number of jurisdictions have yet to rule on constitutional contract claims and, in those that have ruled, the decisional law is in flux and bordering on incoherence.

Principled Conservatism: The CARES Act and the Lone Voice

Chad G. Marzen

The Coronavirus Aid, Relief and Economic Security (CAKES) Act was the largest spending bill passed by Congress and enacted into law in American history. This Article concludes that despite all of the criticism he has endured, Congressman Massie's lone voice calling for a vote for over $2 trillion in government spending will be remembered years from now as a beacon and clarion call for fiscal and principled conservatives. The Article also examines two prior historical instances which involved a lone voice in the United States House of Representatives: Congresswoman Jeannette Rankin's lone vote against a declaration of war with Japan in 1941 and Congresswoman Barbara Lee's lone vote against the war in Afghanistan in 2001. Both the lone votes of Congresswoman Rankin and Congresswoman Lee illustrate that taking a principled, highly unpopular stance at the risk to one's political career in the United States House of Representatives can result in a positive, long-term legacy. This Article predicts Congressman Massie's lone voice will be viewed in the same lens in the future.

Rethinking Open- and Cross-Market Manipulation Enforcement

Joseph Zabel

The modern stock market bears little resemblance to its form when the statutes designed to regulate it were first enacted. In the twenty-first century, the market is almost entirely digital--replete with interconnected instruments and exchanges--spanning multiple jurisdictions and products. As recently as 1969, trades could take over a week to clear; now in the era of high-frequency trading they are effectively instantaneous. With the influx of more exchanges and instruments that trade on those exchanges, transacting at dizzying speed and magnitude, new and more difficult-to-identify forms of market distortion have emerged. Chief among those forms of distortion is open-market manipulation.

Open-market manipulation--in which a trader uses facially legitimate trading methods in order to camouflage non-bona fide trades (including manipulations across markets and even in the crypto currency sphere)--has frustrated regulators and, in particular, prosecutors. Prosecutors and courts have struggled to fit open-market manipulation into an anachronistic statutory regime and particularly labored to prove the requisite criminal intent to manipulate in schemes comprised of facially valid trades. This failure of the law to match the conduct is exacerbated by the use of complex high-frequency trading algorithms. Since manipulative intent may often be embodied in the design of the trading algorithm itself, it presents a literal and figurative black box in certain cases. These difficulties are especially acute in the context of cross-market manipulation, in which the manipulation is based on the interplay of two different markets. In terms of its negative effects, potential magnitude, and increasing frequency, open-market manipulation, particularly cross-market manipulation, should be considered among the most volatile and dangerous forms of white-collar crime and apriority for the Department of Justice and regulators alike.

This Article first identifies where the critical issues in modern manipulation prosecution lie and the split among federal circuits regarding whether open-market manipulation is even a violation of the securities laws at all. This Article then proposes solutions to these issues in the form of principles upon which regulators and judges should rely, as well as a statutory proposal to bring the regulatory landscape up to speed in an increasingly fast, complex, and volatile digital trading world. In that vein, this Article is the first to do several things. It is the first to provide an in-depth analysis of the distinct challenges involved in prosecuting open-market manipulation. It is also the first to demonstrate the particular pronounced difficulties necessarily involved in detecting regulating and prosecuting cross-market manipulation. Finally, it is the first to propose a tangible statutory solution to the urgent issues involved in deterring and prosecuting these forms of manipulation.

Automating Universal Wealth: How Robo Advisors Can Improve Capital Market Efficiency

Andrew Kingsbury

Public markets serve a central role in modern economies. These markets enable global operations to operate at a once inconceivable scale. An ancillary--but important--function of public markets is their price discovery function. A central economic theory is that in an efficient capital market, the secondary market processes all the information about that company, which is then reflected in how the market prices that company's securities. This theory is so central to modern finance that it has become inextricably tied with U.S. securities laws and is consistently cited throughout the nation's courts. However, this theory has long engendered vigorous debate. Many economists, scholars, judges, and the like doubt the existence of the theory and question the merits on which it is based. One need not look further than the events that transpired early in 2021--with many unprofitable companies soaring to new all-time highs after the companies' ticker symbols gained favor on online messaging boards. This Note argues that perhaps it is not that the market cannot accurately reflect information and incorporate it into a security's price, but rather that market participants disturb the market's ability to do so in some instances. This Note proposes a theoretical framework arguing for a regulatory approach that favors algorithmic trading to best capture gains and more effectively spread wealth among all market participants.

Repo Turmoil and Lessons for Liquidity Policy

Andrew Tynes

This Note considers repo market stress in September 2019. First, I find that the multiple causes of that market disruption--fiscal, monetary, and regulatory--suggest the need for more comprehensive review of liquidity policy frameworks. I then review recent proposals to prevent future repo funding disruptions, evaluating them against the efficiency and financial stability goals of liquidity policy. This work contributes to the literature first, by consolidating multidisciplinary perspectives on structural and regulatory flaws in short-term funding markets, second, by introducing and discussing newly available data from the Office of Financial Research, and third, by reinterpreting old proposals and discussions through the lens of the mid-September episode.

Volume 14

Volume 14.1

When, As, and If: How an Obscure Security Could Make Initial Public Offerings More Efficient

Frederick A. Elmore IV

Public equity markets face increasing competition from private sources of capital. Once a rich and reliable source of diversified wealth creation, the growth of relatively inexpensive substitute financing sources has attenuated the size and diversity of the public markets. While looking for ways to make the public securities markets more attractive, Congress should consider taking a cue from the market’s past. When-issued trading could help reduce the transaction and agency costs associated with the current firm-commitment IPO process, making public markets more attractive and accessible to private companies. As an independent signal and unbiased estimate of the underlying security’s secondary market price, the when-issued market price could provide greater certainty about aggregate demand for the offering and allay agency concerns, potentially leading to lower underpricing spreads. The resulting increase in efficiency of the IPO pricing process would benefit capital formation by making the transition to public markets more attractive to private companies. The creation of a regulated when-issued market for IPOs could be accomplished with a simple amendment to the Securities Act and a new SEC regulation pursuant to Section 12(d) of the Exchange Act.

Protecting Retail Investors: A New Exemption for Private Securities Offerings

Thomas M. Selman

The Securities and Exchange Commission (“SEC” or “Commission”) has embarked upon a comprehensive review of the framework for the exemption of securities offerings from the Securities Act of 1933 (“Securities Act”). The author proposes that the SEC open private placements to more retail investors, while better protecting them from hucksters and scammers. Many have questioned whether the wealth tests in Rule 506 ensure that “accredited investors” are sophisticated. Fewer commentators have written about the Rule 506 exemption for non-accredited investors. Issuers to non-accredited investors must comply with modest principles, but the non-accredited investor must otherwise fend for himself or receive assistance from a “purchaser representative” upon whom the rule imposes no obligation. This article recommends an exemption to better protect both accredited and non-accredited investors. Any investor, whether or not accredited, would be permitted to purchase a private offering if he or she has retained a purchaser representative who is a registered broker-dealer or investment adviser required to act in the investor’s best interest. Issuers to non-accredited investors would also be relieved of unnecessary regulatory burdens, such as requirements that the issuer appraise investor knowledge and experience, make disclosures to the investor and limit the number of non-accredited investors. Reducing these burdens could open new investment opportunities for retail investors while strengthening their legal protection.

Inadvertent Partnerships and Fiduciary Duties

Emeka Duruigbo

Individuals and American companies, who enter into negotiations for potential collaborative business opportunities within and outside the United States, risk their proposed venture being judicially characterized as a general partnership. “Inadvertent partnerships” are generally characterized as general partnerships formed through the parties’ conduct in a potential joint enterprise, irrespective of the parties’ intentions to form one. These types of partnerships currently exist in sufficient numbers to warrant the attention of scholars, practitioners, and policymakers. Being characterized as a general partnership results in significant legal implications, such as personal liability of the partners for debts and obligations of the business.

Recently, these issues resurfaced in a Texas case arising out of a business relationship between two energy companies evaluating the feasibility of a joint pursuit of an oil pipeline construction project. One of the Texas companies abandoned the proposed deal, and entered into a commercial arrangement with a Canadian company for the construction of the oil pipeline. Finding that a partnership had been formed, and the duty of loyalty breached, the jury awarded the plaintiff company more than $500 million in damages. However, the Texas Court of Appeals overturned the verdict, and recently, the Supreme Court of Texas affirmed the Court of Appeals’ decision.

The fact that parties entering into a business relationship can constitute a general partnership, without any intention of ever becoming partners, is particularly worrisome in light of the potential exposure each party faces. Specifically, each party could be held personally liable to third parties for the acts or contracts of one of the other parties, including those they have not explicitly authorized. Even more troubling, those parties could also face damaging financial consequences for breaching a fiduciary duty to those whom they never intended to owe such duties.

In the wake of this unexpected and ground-shaking Texas trial court decision, many proposals have surfaced in an effort to prevent such situations from reoccurring in the future. Some of these proposals include adding a statutory amendment that only recognizes general partnerships formed under a written partnership agreement, encouraging contractual modifications to the duty of loyalty, and having parties undertake due diligence actions while negotiating a deal in order to avoid their relationship being categorized as a general partnership when they did not intend to form one. Nevertheless, these proposals are fraught with serious problems that challenge both their utility and practicability. Therefore, this Article explores a different and somewhat unexplored line of inquiry. Specifically, this Article proposes a statutory amendment that would keep fiduciary duties among partners as the default rule, thus, continuing to protect partners who want their relationship to be governed by such duties, while also allowing other partners to contract out of these duties when they do not believe they would serve a useful purpose. This amendment is especially valuable to sophisticated parties; particularly those who did not intend to form a partnership. Under the proposed statutory amendment, it would suffice for the parties to include a simple sentence in their negotiation document or agreement disavowing an intent to create a partnership, and stating that, even if their relationship is eventually characterized by a court or tribunal as a partnership, the parties have agreed not to owe each other the duties of care and loyalty.

A Case of Mistake Identity: Questioning the U.S. Supreme Court’s Contract Theory of Arbitration

Cornelis J.W. Baaij

The United States Supreme Court explains its expansive application of the Federal Arbitration Act (“FAA”) by utilizing a pluralist theory of contract, which integrates principles of contractual autonomy and operational efficiency. A contract theory of arbitration justifies the state’s enforcement of arbitration agreements and the resulting arbitral awards. However, circular reasoning in the Court’s precedent reveals a category mistake. The Court’s reasoning suggests that the value of autonomy and efficiency are only instrumental to a third, unexpressed policy principle. By looking to the FAA’s broader legislative background, on which the Court relies, this Article demonstrates that the theory best capable of explaining the Court’s precedent is not one of contract, but one of government, namely, a theory of laissez-faire capitalism under which the state pledges its coercive force to a quasi-judicial branch of the private sector. This finding warrants a reassessment of the conditions under which state power is to be extended to support arbitration, and thus, whether a Congressional course-correction is warranted.

Volume 14.2

More JoMo less FoMo: The Case for Voluntary Disclosure of Uncertain Information in Securities Regulation

Ido Baum & Dov Solomon

The “fear of missing out” (“FoMo”) is a phenomenon that influences human behavior with regard to future events, and helps explain why investors have such a high demand for information regarding unfolding corporate events. Given the imprecise nature of this information, the uncertainties that it implicates, and its importance to investors, information about unfolding events has received special attention in securities regulation. Although the disclosure regimes of securities regulation appear to operate in a globally harmonized and synchronized system, this Article reveals the stark differences that currently exist between the United States' and European Union's rules governing the disclosure of this crucial type of information. Moreover, this Article counterintuitively argues that, in the case of information about future events, less is more. Specifically, this Article reveals that the trend towards the “joy of missing out” (“JoMo”) is in fact a better response for regulating the disclosure of uncertain future information. This Article innovates by demonstrating how a regulatory architecture that builds on the interplay between insider trading prohibitions and voluntary disclosure is superior to a mandatory disclosure regime. This type of regulatory structure creates a more efficient and less cluttered supply of material information to investors, while also reducing compliance and enforcement costs, thereby bolstering the performance of financial markets.

What Ethical & Strategic Employers Should Do about Arbitration

Dale B. Thompson & Susan A. Supina

Recent Supreme Court jurisprudence on arbitration presents significant obstacles to the protection of employee rights and interests. In this Article, the authors appeal to a different forum: ethical and strategic employers (and their lawyers). In addition to recommending changes to general arbitration policies, this Article outlines two specific situations where fundamental changes are necessary. In regards to handling masses of claims brought by similarly affected employees, this Article suggests a novel process: “clustered arbitration.” Specifically, clustered arbitration would enable employees to pool their resources in a cluster of arbitral nodes, while also offering an option of a limited appeal. However, in cases of sexual harassment, this Article argues that ethical and strategic employers must go further. In particular, the authors recommend a carve-out from mandatory pre-claim arbitration for claims of sexual harassment. By adopting these recommendations, employers can improve long-run performance, and may save arbitration from itself.

Merchant Authorized Consumer Cash Substitutes

Steven Stites & Norman I. Silber

Devising a Royalty Structure That Fairly Compensates a Franchisee for Its Contribution to Franchise Goodwill

Robert W. Emerson & Charlie C. Carrington

When a franchise's ownership and goodwill distribution under a franchising agreement are the subject of a dispute between two parties, the characterization of the parties' franchise relationship is often contested. For example, in disputes arising from issues related to franchise network creativity, transfers, and terminations, parties in a franchising agreement typically make assertions about the nature of their relationship according to what they hope to gain from the resolution of the particular dispute, rather than facing the truth about their franchisor-franchisee relationship. Accordingly, these types of disputes have generated a large degree of uncertainty about the true nature of franchise goodwill, while also obscuring how certain components of the franchise business model are defined.

In order to resolve these issues, this Article suggests incorporating a clear set of goodwill guidelines and expectations in franchise royalty structures, which would make franchise goodwill more coherent and transactable. Specifically, this Article proposes adopting a “variable” royalty structure, which would fluctuate in response to the goodwill contribution by franchisees. Under this variable royalty structure, franchisees' royalty rates would decrease in response to above average performance (i.e., a franchisee's superior “contribution”) and increase in response to below average performance (i.e., a franchisee's “free riding”). By producing a formal method for computing franchise goodwill, this variable royalty arrangement could add much needed clarity and consistency to goodwill treatment in the franchising context. Additionally, franchisors could also benefit from this variable royalty structure by incentivizing good franchisee behavior through systemic goodwill--i.e., providing the franchisee “just” compensation through reduced royalty rates.

In short, the proposed variable royalty system intends to simultaneously balance power in the franchising relationship, bring consistency to the legal identity of franchisees, and mitigate franchisee free riding.

Red, Yellow, Or Green Light?: Assessing the Past, Present, and Future Implications of the Accredited Investor Definition in Exempt Securities Offerings

Blake W. Delaplane

Since issuing its landmark decision in SEC v. Ralston Purina, the Supreme Court has energized decades of discussion in the courts, across various federal agencies, and in the marketplace, regarding which investors can “fend for themselves.” In light of additional clarification provided by the Securities and Exchange Commission (“SEC”) in subsequent rulemakings, investors now have more extensive guidance on the “accredited investor” definition. This definition is crucial because it decides who gets to invest in exempt securities offerings, which are typically less liquid, higher returning, and less volatile than other securities. However, the accredited investor definition does not simply act as a door to the exempt offerings marketplace that swings wide open when approached by investors holding appropriate financial profiles. Rather, this definition may also determine how much the door swings open at all. Today, the exempt marketplace has grown to nearly $3 trillion in capital raised per year. For better or for worse, the accredited investor definition remains a key vehicle through which retail investors may seek to diversify their portfolios, access higher returns, and reduce volatility in recessionary times. Under the leadership of Jay Clayton, the SEC has amended the accredited investor definition once more. This Article argues that, going forward, the SEC should consider regulatory proposals that will narrowly tailor the pool of investors qualifying as “accredited” under the Ralston Purina rubric, and to consider other ways in which the SEC can ensure investors in exempt offerings are able to “fend for themselves.” In light of the SEC's most recent rulemaking, an honest review of prior SEC guidelines is neccesary to shed light on how to ideally legitimize efforts to democratize the exempt offering marketplace through amending the accredited investor definition.

Volume 13

Volume 13.1

Cracking the Preemption Code: The New Model for OTC Derivatives

Barry Taylor-Brill

Salvador Dali's famous painting, "Gala Contemplating the Mediterranean Sea which at Twenty Meters Becomes the Portrait of Abraham Lincoln (Homage to Rothko)," is prominently displayed in the main hall of the Teatre-Museu Dali in Dali's hometown of Figueres, Spain. Up close, it is a painting of Dali's wife, Gala. At a distance, the viewer sees it transform into a portrait of Abraham Lincoln. Dali's masterpiece is a perfect metaphor for how, under Title VII of the Dodd-Frank Act, a well-designed preemption model for derivatives comes into view when one steps back far enough to see the bigger picture.

Merit Management Group, LP v. FTI Consulting, Inc.: Narrowing the §546(e) Safe Harbor

Katie Drell Grissel

From Compulsion to Compensation: How Selective Waiver Compensates Corporations for Involuntary Disclosures

Keyawna Griffith

Selective waiver is necessary to prevent corporations from losing their attorney-client privilege and work product doctrine as a result of government compulsion. The majority of circuit courts reject selective waiver in some form. They believe selective waiver stems from voluntarily disclosing confidential or privileged information to the government, distorts the purposes of the attorney-client privilege and work product doctrine, and constitutes a tactical advantage for the corporation. However, this Note will argue that selective waiver can be exercised under current legislation and doctrine. It is an extension of the attorney-client privilege and can be enforced under Federal Rule of Evidence 502. Contrary to what almost all of the circuit courts that have addressed selective waiver have said, this Note asserts that a corporation's decision to disclose to the government while under pressure is an involuntary disclosure. This is a key reason why selective waiver is fair and deserves to be recognized.

Volume 13.2

Fiduciary Duties in Activist Situations

Hon. J. Travis Laster

Dual-Class Index Exclusion

Andrew Winden & Andrew Baker

One of the most contentious and long-standing debates in corporate governance is whether company founders and other insiders should be permitted to use multi-class stock structures with unequal votes to control their companies while seeking capital through a public listing. Stymied by the permissive attitudes of legislatures and regulators, institutional investors opposed to multi-class arrangements recently turned to a new potential source of regulation: benchmark equity index providers. At the behest of institutional investors, the three largest index providers recently changed the eligibility requirements for their benchmark equity indexes to exclude, limit or underweight companies with multi-class stock structures. Investors expected the prospect of exclusion from such indexes to discourage founders and directors from adopting dual-class stock structures in connection with their initial public offerings.

While there is a voluminous financial literature on the effects of index inclusion and exclusion on stock prices, and legal scholars have recently explored the corporate governance implications of the exponential growth of passive index investing, focusing primarily on the incentives of index fund asset managers, neither the financial nor the legal literature have considered the corporate governance role and influence of the parties who write the rules for index investing: the index providers. We begin to fill this gap in the literature by assessing the efficacy of index providers as corporate governance arbiters through the rubric of their dual-class index exclusion decisions.

We start with the premise that the index exclusion sanction will not discourage dual-class listings unless it is sufficiently costly to outweigh the perceived benefits of founder control through a multi-class stock structure. We expect the index exclusion sanction will not be sufficiently costly for several reasons. First, it is difficult, if not impossible, to implement a sanction through the public capital markets. Second, the index inclusion effect on which the anticipated sanction is premised has effectively disappeared in recent years and may never have been a long-term source of lower capital costs. Third, despite the explosive growth of index investing in recent years, funds following stock indexes still hold a relatively modest percentage of the market capitalization of U.S. equities—around 12% according to BlackRock. Finally, the proliferation of index investing opportunities has weakened the market-moving influence of any one benchmark index.

To test the efficacy of the sanction, we conduct an event study of the S&P announcement that dual-class companies would henceforth be excluded from the S&P 1500 Composite Index and its components—the S&P 500, S&P 400 mid-cap and S&P 600 small-cap indices. Because S&P grandfathered dual-class companies currently in the index, we are able to compare movements in the stock prices of dual-class companies currently in the index with movements in the stock prices of dual-class companies not yet included in the index at the time of announcement. We do not observe any statistically significant abnormal returns in the stock prices of either included or excluded firms as a result of the S&P announcement, suggesting that exclusion is not expected to have a significant adverse cost of capital effect on firms that elect to list with a dual-class stock structure in the future and that the sanction is ineffective. In the absence of an effective sanction, the exclusion of dual-class shares from benchmark equity indexes will not affect corporate governance choices. It may, however, have material adverse consequences for index investors and the index providers themselves.

From Dodge to eBay: The Elusive Corporate Purpose

Dalia T. Mitchell

This article examines the history of the law of corporate purpose. I argue that the seemingly conflicting visions of corporate social responsibility and shareholder wealth maximization, which characterize contemporary debates about the subject, are grounded in two different paradigms for corporate law—a socio-political paradigm and an economic-financial one. Advocates of the socio-political paradigm have historically focused on the power that corporations could exercise in society, while those embracing the economic-financial paradigm expressed concerns about the power that the control group could exercise over the corporation’s shareholders. Over the course of the twentieth century, scholars have debated the merits of each of these paradigms and the concerns associated with them, while judges drew upon the academic and, more importantly, the managerial sentiments and concerns of the era to attach a purpose to corporate law’s doctrine, that is, the ultra vires doctrine in the early twentieth century, the enabling business judgment rule by midcentury, and the laws applicable to evaluating managerial responses to hostile takeovers at the century’s end. Ultimately, the cases seemingly addressing corporate purpose did not endorse wealth maximization or social responsibility as objectives. Rather, they empowered corporate managers to set corporate goals without interference from shareholders or the courts.

The Case for Doing Nothing About Institutional Investors’ Common Ownership of Small Stakes in Competing Firms

Thomas A. Lambert & Michael E. Sykuta

Recent empirical research purports to demonstrate that institutional investors’ “common ownership” of small stakes in competing firms causes those firms to compete less aggressively, injuring consumers. A number of prominent antitrust scholars have cited this research as grounds for limiting the degree to which institutional investors may hold stakes in multiple firms that compete in any concentrated market. This Article contends that the purported competitive problem is overblown and that the proposed solutions would reduce overall social welfare.

With respect to the purported problem, we show that the theory of anticompetitive harm from institutional investors’ common ownership is implausible and that the empirical studies supporting the theory are methodologically unsound. The theory fails to account for the fact that intra-industry diversified institutional investors are also inter-industry diversified, and it rests upon unrealistic assumptions about managerial decision-making. The empirical studies purporting to demonstrate anticompetitive harm from common ownership are deficient because they inaccurately assess institutional investors’ economic interests and employ an endogenous measure that precludes causal inferences.

Even if institutional investors’ common ownership of competing firms did soften market competition somewhat, the proposed policy solutions would themselves create welfare losses that would overwhelm any social benefits they secured. The proposed policy solutions would create tremendous new decision costs for business planners and adjudicators and would raise error costs by eliminating welfare-enhancing investment options and/or exacerbating corporate agency costs.

In light of these problems with the purported problem and shortcomings of the proposed solutions, the optimal regulatory approach—at least, on the current empirical record—is to do nothing about institutional investors’ common ownership of small stakes in competing firms.

The Woeful Inadequacy of Section 13(d): Time for a Paradigm Shift?

Maria Lucia Passador

Undoing a Deal with the Devil: Some Challenges for Congress’s Proposed Reform of Insider Trading Plans

John P. Anderson

The Unfulfilled Promise of Hedge Fund Activism

J.B. Heaton

Hedge fund activism has mostly disappointed. While hedge fund activists are good at motivating sales of companies to potentially-overpaying acquirers, hedge fund activism is neither the threat to corporate strength that hostile commentators have claimed nor a meaningful force for better corporate performance. Instead, more than a decade of research shows hedge fund activism to be economically unimportant to corporate performance one way or the other. Hedge fund activists have disappointed their investors as well, generating unimpressive returns. I explore three reasons why hedge fund activism has mostly disappointed. First, hedge fund activists have no comparative advantage in generating ideas for meaningful competitive advantage at target firms. Second, hedge fund activists likely suffer from a form of winner’s curse where the hedge fund activist is too pessimistic about the firm it targets. Third, hedge fund activists often target declining firms, the equity in which is often unsalvageable by the time the activist has taken notice. In the end—and in the spirit of Edison’s famous comment about his failures on his way to inventing the light bulb—we have learned little more from a decade of research on hedge fund activism than one additional way that shareholder activism does not work.

The Seller’s Curse and the Underwriter’s Pricing Pivot: A Behavioral Theory of IPO Pricing

Patrick M. Corrigan

Canonical theories of law and economics predict that issuing firms in initial public offerings (IPOs) demand—and that competitive markets produce—a transaction structure that maximizes value to issuers. Yet, since 1980, corporate America has left approximately 19 cents of foregone proceeds on the table for every dollar it has raised in IPOs. Moreover, the standard IPO contract appears designed to exacerbate rather than resolve agency costs, information asymmetries, and other foreseeable causes of IPO underpricing. This Article studies a new puzzle: why don’t issuers anticipate their transactional vulnerability and bargain for a sale of stock contract that protects them against foreseeable causes of underpricing?

To explain this puzzle, I model issuer heterogeneity in a novel way. Some fraction of issuers have managers that—when they engage an underwriter months before the IPO—fail to anticipate their underwriters’ incentives or capacity to impose underpricing when the IPO is priced. The interaction between market forces and managerial psychology at these naïve issuers explains the structure of the standard IPO contract. Conditional on using the standard IPO contract, underwriters pivot between two strategies. In the IPOs of naïve issuers, underwriters hold up and underprice IPOs. In the IPOs of sophisticated issuers, underwriters short sell the issuing firm’s stock and overprice IPOs.

The model predicts efficiency losses and wealth transfers from naïve issuers and one-shot investors to underwriters, repeat investors, and sophisticated issuers in IPO markets. The behavioral theory I present provides a more comprehensive explanation for IPO pricing and practices than existing accounts, and supports arguments for substantive reforms to federal broker-dealer regulation.

Volume 12

Volume 12.1

A Consumer Behavioral Price Approach to Resale Price Maintenance

Thomas K. Cheng

This Article reexamines the various pro-competitive justifications and theories of harm for resale price maintenance (“RPM”), one of the most controversial practices in antitrust law. It argues that the existing literature overlooks three important issues regarding RPM, namely, the kind of retail service invoked in a justification, the kind of retailer at issue, and the prevailing model of consumer behavior. All three issues have important implications for the plausibility and validity of the various justifications and theories of harm for RPM. It argues that most of the existing literature presumes the inter-brand primacy model of consumer behavior. Once this model is not applicable, much of the prevailing analysis breaks down and the legality of RPM needs to be reconsidered. In particular, this Article demonstrates that many of the accepted justifications for RPM are of doubtful validity or are only valid under limited circumstances. This lends support to a more hostile view of RPM.

Conceptual and Institutional Interfaces between CSR, Corporate Law and the Problem of Social Costs

Benedict Sheehy

CSR is now understood as “de facto business law” and is increasingly the preferred approach to addressing the social impacts of industry. CSR as a political agenda assumes a significant law reform agenda. As a construct, however, CSR is unclear and its interfaces with politics, social costs, and corporate law are at times obscure. In particular, much of the thinking about CSR fails to adequately take into account the systemic nature of social costs, the legal history and nature of the corporation, and law’s general response to social costs. In this regard, the CSR agenda fails to correctly connect problems, some of which are systemic in nature, with remedies. Further it often fails to take into account existing institutional relationships. This Article examines the conceptual constructs of and interplay between CSR, social costs, and the corporation, identifies the reform agenda, and discusses, as of yet unresolved issues in this growing area of theory and practice.

Preserving Antitrust Class Actions: Rules 23(B)(3) Predominance and the Goals of Private Antitrust Enforcement

Steven B. Pet

Private antitrust plaintiffs suing under Section 4 of the Clayton Act may recover damages triple their actual losses and recoup litigation costs and attorneys' fees. Unfortunately, the potential recovery in antitrust cases is often too small to justify the time, expense, and risk of litigation. Congress passed Section 4 of the Clayton Act to compensate victims of antitrust violations and to deter anticompetitive conduct, but neither goal can realistically be achieved if private plaintiffs lack adequate incentives to bring cases. The class action mechanism plays a critical role in solving this problem. Under Rule 23 of the Federal Rules of Civl Procedure, similarly situated plaintiffs can consolidate numerous small claims into one large class action.

In recent years, however, many courts have grown to doubt the utility of class actions, both in the antitrust context and in general. Perhaps nowhere is this trend more evident than in the judicial development of Rule 23’s class certification requirements, and in particular the predominance requirement under Rule 23(b)(3). Though courts have, until recently, found predominance “readily met” in antitrust class actions, this is not the case today. Courts now conduct a “rigorous analysis” of the evidence and require plaintiffs to show common evidence of antitrust injury to satisfy the predominance requirement. Academics, too, have increasingly trained their fire on class actions, singling out antitrust class actions for special scrutiny. Critics argue that antitrust class actions do a poor job advancing either the compensation or deterrence goal of private antitrust enforcement.

This paper argues that this criticism is largely unsupported. In light of recent studies showing that antitrust class actions do at least a fair job of compensating victims and deterring anticompetitive conduct, the judicial tightening of the predominance standard looks particularly unwarranted. Antitrust courts should adopt an approach to predominance that considers not only the magnitude of individualized issues presented, but also the presence or absence of practical alternatives to relief and the deterrence and compensation benefits that class actions generate. Such an approach accords with the plain language of Rule 23 and gives appropriate weight to the congressionally recognized policy concerns at stake.

Oh, Snap: Do Multi-Class Offerings Signal the Decline of Shareholder Democracy and the Normalization of Founder Primacy?

Kristy Wiehe

This comment examines the recent trend of multi-class share offerings, using the 2017 IPO of Snap, Inc. as a case study of corporate governance issues related to non-voting shares. Multi-class share structures allow companies to realize significant economic benefits from investor-shareholders while significantly limiting such investors’ means to hold management—especially founders—accountable for actions that may undermine shareholder wealth. From the examination of these multi-class stock structures, this piece introduces the theory of “founder primacy” as a new, competing theory against the well-established concepts of shareholder primacy and director primacy. This comment ultimately argues that the observed movement toward multi-class stock structures will continue to undermine shareholder democracy in favor of founder primacy.

Volume 12.2

Knocking at the Boardroom Door: A Transatlantic Overview of Director-Institutional Investor Engagement in Law and Practice

Giovanni Strampelli

Under the current context of (re)concentrated ownership, institutional shareholders are expected to play a more active role in corporate settings by making managers more accountable and urging them to favor a long-term view of business prospects. Calls from institutional investors for engagement with boards of directors have grown and private dialogue with individual directors is now an important instrument of institutional investor activism. In spite of this favorable trend, director-shareholder dialogue is still problematic. Public disclosure and insider trading rules set legal constraints on board-shareholder engagement. However, the reach of these constraints should not be overstated, as they do not appear to ban outright all private dialogue between directors and shareholders. In this regard, recommendations within corporate governance and stewardship codes, and from practitioners, have played a major role in developing a practical framework for director-shareholder dialogue that seeks to prevent the violation of insider trading and public disclosure rules, and to make dialogue more effective. Against this backdrop, this article will provide a comparative transatlantic overview of recent developments in the area of director-institutional shareholder dialogue in the United States and in Europe with the aim of assessing the effective reach of legal constraints on board-shareholder dialogue under current legislation, and considering some practical solutions offered by corporate governance and stewardship codes that could facilitate board-shareholder engagement and enhance its effectiveness.

Regulation A+: New and Improved After the JOBS Act or a Failed Revival?

Neal Newman

This piece is a follow-up to a previous article that I wrote on Regulation A. In April of 2012, then-President Barack Obama signed into law the Jumpstart our Business Start Ups (JOBS) Act. Under the JOBS Act’s Title IV, Congress made revisions to a private offering exemption referred to as Regulation A with the intention of reviving an exempt offering option that was close to dormant. The primary Regulation A criticism being that issuers were required to do too much in terms of providing business and financial disclosure where the most the issuer could raise through a Regulation A offering was $5 million.

In response, the JOBS Act made several changes to Regulation A; the most notable change involved raising the offering cap from $5 million to $50 million. In my previous piece, I roundly criticized the Regulation A changes promulgated through the JOBS Act. In that previous article I argued that Regulation A was flawed at inception and that the change to Regulation A in sum did nothing to make the regulation more appealing. The previous piece was speculative, however as the Securities and Exchange Commission had not drafted its final rules until the summer of 2015. Thus the piece was published before having the benefit of assessing how issuers might respond to Regulation A as revised.

This current piece is the rare occasion where I double-back on the assertions made in a previous article and see if in fact I was correct or whether I missed the mark. In writing this follow up article, my findings were educational. The effort taught me to be ever vigilant about the intersection between the theoretical and the practical. My research revealed that Regulation A has grown exponentially in terms of issuer use and popularity which is contrary to what I was expecting. Therefore, I was wrong in that regard and I am fine with acknowledging that.

To be fair and dispassionate, in this article I have concluded that Regulation A, as revised, while still having some flaws, is an example of Congress using its legislative powers to take something that was structurally flawed and problematic and making it into something that now appears to be viable, usable, and more appealing to emerging growth and start-up companies.

A word of caution, however. My findings also surfaced a call for a healthy dose of vigilance as well. There are storm clouds gathering over the Regulation A offering exemption. The increased offering sizes allowed under Regulation A coupled with the lack of investor sophistication (dynamics exclusive to Regulation A) could leave many investors exposed to investing in companies that in hindsight they would have been better off taking a pass on. These issues and the corresponding discussions unfold in the pages that follows.

The Appointments Clause and the SEC’s Administrative Law Judges: Protecting the Separation of Powers, Political Accountability, and Investors

Susan Lorde Martin

The United States Securities and Exchange Commission (“SEC”) and its administrative law judges (“ALJs”) have come under heavy legal fire in the last seven years because of the increase in proceedings the SEC has brought before its ALJs. Alleged violators of securities laws have used a variety of arguments to protest their cases being heard administratively instead of in federal district court, but the one creating the most jurisprudential interest is the claim that administrative adjudication constitutes a violation of the Constitution’s Appointments Clause.

This article argues that an appropriate interpretation of the Appointments Clause and the SEC’s adjudication procedures should focus on their purposes as determined by the Framers of the Constitution and by Congress. The article starts with a discussion of those purposes and how the Clause is applied. A discussion of the Administrative Procedure Act (APA) follows because it sets the rules governing ALJs. The article focuses on the SEC’s ALJs, the recent cases that have made them the center of controversy, and the attacks against them. The article makes the case that the Appointments Clause argument against the constitutionality of the SEC’s ALJs is a red herring used by respondents in SEC administrative proceedings and, unfortunately, acceded to by some courts. The article concludes that those courts have made a mistake because they have not focused on the purposes of the Appointments Clause or the SEC’s mandate, but nevertheless, the problem can be solved either by the SEC itself, by the United States Supreme Court, or by Congress.

Accounting for Contingent Litigation Liabilities: What You Disclose Can Be Used Against You

Linda Allen

In order to analyze firm value, investment analysts require information on potential losses from contingent liabilities such as litigation damages. However, revelation of the firm’s private estimates of the probability of loss and possible legal damages can be detrimental to the firm by increasing the costs of settlement. That is, opposing counsel may utilize the firm’s financial disclosures about contingent litigation costs to drive settlement demands. Thus, firms choose to shirk their responsibilities to disclose material litigation liabilities in their financial disclosures. Financial disclosures thereby contain insufficient information about the monetary value of potential litigation damages even for large cases with material litigation risks. This outcome is harmful to investors and management alike.

I propose an accounting regulatory disclosure model that uses publicly-available data to provide noisy, but useful estimates of class action securities litigation damages in fraud on the market cases that does not require full disclosure of sensitive private information about the firm’s internal assessment of litigation merits. However, a collective action constraint prevents firms from voluntarily utilizing this information-enhancing solution without regulation to coordinate accounting disclosure requirements. I show that accounting requirements could be revised to induce mutually beneficial information disclosures that would improve the information content in financial statements with regard to contingent litigation liabilities in fraud on the market suits.

Omens of Overregulation: Why the SEC Should Abandon It's Course toward Broker-Dealer Regulation of Private Equity Fund Managers

D. Butler Sparks

As private money has emerged as a viable alternative for America’s businesses to raise funds without subjecting themselves to the regulatory burdens of the public markets, it is important to ensure that the investors who ultimately supply this private money are protected. However, as with any regulatory effort, the aim should be to strike the right balance between protection and efficiency. Under-regulation could leave investors without valuable safeguards that promote trust in the financial industry, while overregulation creates burdens that ultimately destroy value for investors and the economy overall. This comment advocates for such a balance.

The SEC has indicated that private equity fund managers could be subject to considerably more regulation if these fund managers continue to collect transaction fees from their portfolio companies. This comment argues that, when considered in the context of the current regulatory framework and the reality of the sophistication of private equity fund investors, further regulation of fund managers as broker-dealers misses this balance. More to the point, this comment posits that imposing broker-dealer regulation on fund managers, while well intentioned, provides little investor protection and creates a disproportionate and value-destroying amount of compliance costs.

Volume 12.3

VUCA

Robert C. Bird

The legal environment is a significant source of disruption for business. With this disruption comes the opportunity for innovation by firms willing to understand how legal systems function. Summarized in Table I, this manuscript shows how firms can respond to legal volatility, uncertainty, complexity, and ambiguity (VUCA) in order to capture value and manage risk. Firms can manage legal volatility by developing an agile organization that is able to exploit new regulatory opportunities before competitors. Firms can overcome legal uncertainty by harmonizing legal and business functions and embracing lawyers as a source of value. Effective management of legal complexity eliminates unnecessary confusion and optimizes the diffusion of legal knowledge so firms can respond better to legal challenges. Firms can thrive in legally ambiguous environments by careful experimentation and developing a learning organization. Law remains one of the last great sources of untapped competitive advantage, and managing legal VUCA successfully can keep a firm ahead of its rivals and promote innovation in the organization.

The Strange Case of the Missing Doctrine and the “Odd Exercise” of Ebay: Why Exactly Must Corporations Maximize Profits to Shareholders?

David B. Guenther

The doctrine that directors of for-profit corporations have a duty to shareholders to maximize profits is widely accepted in U.S. law. A coherent account of the origin and purpose of this doctrine is, however, strangely missing. The duty to maximize profits is not found in any American statute, has no accepted doctrinal foundation, and has been addressed by only two cases of any significance in the last 100 years — Dodge v. Ford Motor Co. and eBay Domestic Holdings, Inc. v. Newmark — neither of which is generally considered to have cited any supporting authority. For a duty so central to corporate governance and the “purpose” of the corporation, the absence of a coherent doctrine is strange, and the efforts of the Delaware Chancery Court to create one in eBay were, in the words of Chancellor Chandler himself, an “odd exercise.”

This Article argues that the profit maximization doctrine emerged from the doctrine of ultra vires in the early 20th century. As articulated in Dodge v. Ford, directors of a for-profit corporation had a duty to maximize profits to shareholders because that is what their shareholders expected, based on the statement of purpose in the corporate charter. Corporate charters have changed, but shareholder expectations remain the only coherent basis for the profit maximization doctrine. Dodge v. Ford should be seen not only as good law, but as an important transitional case.

Chancellor Chandler in eBay, by contrast, found in the corporate charter a mandate to maximize profits in spite of shareholder expectations. Chancellor Chandler found this mandate by applying Unocal Corporation v. Mesa Petroleum Company to Craigslist’s poison pill, despite the admitted absence of factors warranting Unocal review, and by redefining Unocal’s “proper” corporate purpose to mean solely “profit-maximizing,” based on Craigslist’s for-profit corporate form. If Dodge v. Ford emerged from the corporate charter, eBay retreats back into it. eBay returns to the ultra vires doctrine and the publicly ordered corporation of the 19th century. If eBay is good law, social enterprises beware.

Is Cash (Always) King? Using the Tax Code to Incentivize Efficient Corporate Charity

Cait Unkovic

Legal scholarship on the legitimacy and value of corporate charity is robust. Proponents argue that both the nexus-of-contracts and entity theories of corporations justify corporate donations, and that such contributions offer unique opportunities that benefit both the firm and the public. Critics argue that the traditional theory of shareholder primacy makes corporate philanthropy ultra vires, that such donations create opportunities for management to appropriate shareholder recourses, and that corporate charity is less efficient than direct services provision. Both positions have merit, and numerous historical examples suggest that the expected value of different types of donations can indeed range from significant to minimal. Nevertheless, as a matter of policy, Congress has decided that tax incentives for corporate charity are here to stay, and as a matter of law, courts have agreed. Indeed, the need to ensure that corporate donations are well tailored to serve the public good is particularly acute now. Congress’s 2017 changes to the Tax Code anticipate firms putting their increased retained earnings to public use, and many charities fear a coming reduction in donations from individuals, as fewer people will choose to itemize once the standard deduction is doubled.

Thus, a fruitful next step for the discussion of corporate charity in legal scholarship is to identify what kinds of corporate charity are most efficient, and how the law can incentivize them over more wasteful donations. In this article I begin that discussion with two proposed changes to the current charitable deduction: 91) reinstating a modified version of the original fair market value deduction for inventory donations, and (2) introducing a modest deduction for corporate services aimed at providing basic needs. If well implemented, these changes should, going forward, improve the overall expected value of corporate charity to both the public writ large and firms specifically, which is currently estimated at 15 to 20 billion U.S. dollars annually.

The Revlon Divergence: Evolution of Judicial Review of Merger Litigation

Brandon Mordue

For over thirty years, stockholder lawsuits challenging mergers predominantly have been governed by the principles formulated in the seminal Revlon decision issued by the Delaware Supreme Court in 1986, which held that boards of directors engaging in a change-in-control transaction have a fiduciary obligation to seek the highest value reasonably available. A series of recent decisions by the Delaware courts, however, caused three significant alterations to judicial review of merger litigation. This Article is a detailed analysis of the cumulative effects of those changes, which are dramatic. Whereas previously the same level of scrutiny applied to all lawsuits challenging mergers approved by independent boards, the contemporary doctrine has diverged into a weak form of review that applies to most cases and a strong version of Revlon that affects, in an outcome-determinative way, a small number of cases. The “classic” version of Revlon exists now only as a residual category capturing misfit cases that do not satisfy the requirements of the new regime. This doctrinal shift empowers stockholders while placing conflicted fiduciaries and corporate advisors in the plaintiff's’ crosshairs.

Volume 11

Volume 11.1

A Statutory and Precedential Approach to Corporate Scienter in Section 10(b) of the Securities Exchange Act

Travis S. Andrews

Every year, hundreds of private lawsuits alleging violations of Section 10(b)’s antifraud provision of the Securities Exchange Act are filed in federal courts. These lawsuits have a substantial impact on the national economy, with millions of dollars at stake in most cases. While the Supreme Court has clarified many questions of ambiguity within the Private Securities Litigation Reform Act of 1995 (“PSLRA”), the court has not opined on the scienter requirement for claims involving a corporate defendant. A circuit split has thus developed surrounding “corporate scienter.” When permitted, this doctrine allows a plaintiff to meet the PSLRA’s pleading requirement by alleging one person had the requisite state of mind when another person committed the fraudulent act. The corporate scienter doctrine therefore allows the plaintiff to more easily bring a lawsuit against a corporate defendant, leading to the potential for forum shopping and inequitable results among defendants. I examine the current circuit split, which was fractured even more after the Sixth Circuit’s recent creation of a new pleading standard. After examining the current approaches to corporate scienter, I study the text and structure of the PSLRA to argue for a new approach to corporate scienter. My suggested approach would require plaintiffs to demonstrate (1) that an executive officer made or approved a fraudulent statement and (2) that the officer had actual knowledge of the statement’s falsity. Such an approach comports with prior, related case law and the structure of the statute.

Do Mutual Fund Investors Get What They Pay for: Securities Law and Closest Index Funds

KJ. Martijn Cremers & Quinn Curtis

Actively managed mutual funds sell the potential to beat the market by picking stocks that are expected to outperform passive benchmarks like the S&P 500. Funds that are marketed as active vary substantially in the degree to which their portfolio holdings actually differ from the holdings of passive index funds. A purportedly active fund with a portfolio that substantially overlaps with the market or any indexed market segment is known as a closet index fund. Since closet index funds charge considerably higher fees than true index funds but provide a substantially similar portfolio, they tend to be poor investment choices. This Article presents empirical evidence on closet index funds, showing that more than 10% of U.S. mutual fund assets currently could be categorized as closet index funds and that high-cost closet index funds substantially underperform their benchmarks. We argue that persistent closet indexing implicates a number of legal issues, including possible liability for fund advisors under the Securities Act and the Investment Company Act. We conclude by discussing potential adjustments to mutual fund disclosures that could help investors identify closet index funds.

Rethinking Self-Dealing and the Fairness Standard: A Law and Economics Framework for Internal Transactions in Corporate Groups

Sang Yop Kang

In the controlling shareholder ownership, tunneling (i.e., wealth transfer from a corporation to a controlling shareholder) is a prevailing business practice. In corporate groups—which are main business associations in many emerging markets—it is reported that tunneling often takes place in the form of internal transactions among affiliated companies. Regarding a controlling shareholder’s incentive to attain private benefits, this Article analyzes three components of a controller’s internal-transaction tunneling: ownership gap, price gap, and the quantity of goods or services. In addition, based on two leading U.S. cases on conflicted transactions, Sinclair Oil Corp. v. Levien and Weinberger v. UOP, Inc., this Article develops an analytical tool to reinterpret the fairness standard in the context of internal-transaction tunneling in corporate groups. Specifically three conditions of the Sinclair standard—a controller’s domination on both sides of a transaction, exclusion of non-controlling shareholders from benefits available to a controller, and detriment of non-controlling shareholders—are rigorously reviewed. This Article also provides courts with law and economics logic for a fair range of price gap, and reinterprets Weinberger to examine a special issue of substantially large internal transactions without abnormal profits (i.e., with normal profits). In addition, this Article explains market-based mechanisms to mitigate tunneling such as non-controlling shareholders’ discounted purchase of stocks and diversified portfolios. In sum, this Article suggests a new, more sophisticated law and economics-based analysis of tunneling/self-dealing. In doing so, this Article will shed light on corporate governance scholarship on tunneling in corporate group settings.

Wholesaling Best Execution: How Entangled are Off-Exchange Market Makers?

Stanislav Dolgopolov

This Article examines the reach of the duty of best execution to and potential breaches of this duty by off-exchange market markers in the context of the evolving business model of these market participants and the current market structure crisis. Several key areas, such as routing practices, order handling functionalities, and the usage of private data feeds, are analyzed.

Volume 11.2

Laxity at the Gates: The SEC’s Neglect to Enforce Control Person Liability

Marc. I. Steinberg & Forrest C. Roberts

The U.S. Securities and Exchange Commission (SEC) emphasizes the importance of holding gatekeepers accountable in order to help effectuate law compliance and sound corporate governance practices. This Article shows that the SEC’s assertions, with respect to individuals at the large enterprises, is mere “jawboning.” This inaction is puzzling as the SEC, from a civil enforcement perspective, has greater statutory authority than does even the U.S. Department of Justice in promoting compliance with the rule of law.

This Article examines the SEC’s refusal to pursue enforcement actions premised on control person and failure to supervise liability against allegedly culpable executives, directors, and other subject persons. This failure is seen most recently by the Commission’s refusal to institute enforcement actions against corporate insiders in the aftermath of the financial collapse of 2008. Instead, allegedly blameworthy publicly-traded companies have paid huge monetary penalties—a punishment which directly harms innocent shareholders—while allegedly culpable insiders largely have avoided government scrutiny.

In this Article, we will explain that by invoking the control person and failure to supervise provisions, the SEC would incentivize subject individuals to fulfill their statutory obligations. In undertaking this task, the Article: (1) discusses the legal authority granting the Commission the authority to utilize these statutory provisions; (2) explains the advantages that these provisions provide over those normally employed by the SEC; (3) addresses recent alleged misconduct resulting in huge monetary settlements with several major financial institutions; (4) sets forth possible rationales explaining why the SEC has declined to invoke these provisions against individuals at the “big player” enterprises; and (5) proposes an enforcement framework that would promote sound corporate governance practices and compliance with the rule of law.

Preferential Treatment and the Rise of Individualized Investing in Private Equity

William Clayton

Preferential treatment is more common than ever in the $4 trillion private equity industry, thanks in part to new structures that make it easier to grant different terms to different investors. Traditionally, private equity managers raised almost all of their capital through “pooled” funds whereby the capital of many investors was aggregated into a single vehicle, but recent years have seen a dramatic increase in what I call “individualized investing”—private equity investing by individual investors through “separate accounts” and “co-investments” outside of pooled funds. Many of the largest and most influential investors have used these individualized approaches to obtain significant advantages that are often unavailable to pooled fund investors.

This raises a question that is both economic and philosophical: Can preferential treatment be a good thing for private equity? The idea of preferential treatment runs counter to many people’s intuitive sense of fairness, but in this Article I make the case that these trends are efficiency-enhancing developments for the industry when managers fully abide by their disclosure duties and keep their contractual commitments. Some forms of preferential treatment made possible by individualized investing create new value for preferred investors without harming non-preferred investors. Others generate what I call “zero-sum” benefits because they are accompanied by offsetting losses to non-preferred investors, but when disclosure is robust and the market for capital is competitive, there are limits on the amount of zero-sum preferential treatment that we should expect. Even zero-sum preferential treatment can increase the efficiency of private equity contracting to the extent that pre-commitment disclosure gives investors a clear understanding of the quality of the investment product that are buying and the true price at which they are buying it.

Policy should seek to blend three elements. First, to support the efficiency gains made possible by individualized investing, it should support individualized contracting between managers and investors and not presume that preferential treatment is an inherently bad thing. Second, to minimize harms to non-preferred investors, it should promote conflicts disclosure, consistent compliance by managers with their contractual commitments, and clear performance and fee/expense disclosure. Lastly, policymakers should seek to promote these goals at low cost, as non-preferred investors will likely bear much of the cost of policies designed to help them, and high costs could have an anti-competitive effect.

Market in the Remaking: Over-the-Counter Derivatives in a New Age

Norman Menachem Feder

In the aftermath of the financial crisis of 2007-08, governments in leading jurisdictions deluged the traditionally free-wheeling over-the-counter derivatives market with legislation and regulation. Political leaders, lawmakers, and regulators not only imposed oversight but also sought to rework the way OTC derivatives trade. They cited reduction in the risk of financial system collapse as justification. This Article reviews key aspects of the new rules, fundamental workings of the OTC derivatives market, and significant issues that OTC derivatives documentation specialists must face. It also shows how the new rules might sometimes fail to advance the intended systemic safety. Regardless, whatever transformation the new rules force the OTC derivatives market to undergo, they layer complexity over already complex documentation norms and increase documentation density. The new rules thus amplify documentation risk, which market participants must manage. Familiarity with the new rules, the traditional documents, and the now additionally needed documents is essential to controlling the intricacy that, more than ever, characterizes the legal structures of OTC derivatives transactions.

The OPEC of Potatoes: Should Collusive Agricultural Production Restrictions Be Immune from Antitrust Law Enforcement

Michael A. Williams, Wei Zhao, & Melanie Stallings Williams

The Capper-Volstead Act, a pre-Depression era statute that allows farmers to cooperate in marketing goods, has been interpreted to permit farming cartels to avoid the application of antitrust law. Such cooperatives set production limits designed to reduce quantities so that prices rise. Normally, horizontal output restrictions would constitute per se violations of antitrust law. Does the Act permit collusion so that production is restricted? An unclear legislative history and a lack of adjudicated cases have left agricultural producers uncertain about the legality of coordinated production limitations under the Capper-Volstead Act. While the practice remains extant—at significant cost to buyers—there are not judicial decisions determining whether the practice is legal. Four class action cases have been filed in recent years involving supply control under the Act (in the milk, egg, mushroom, and potato industries). However, because of the expense, uncertainty, and high stakes of such cases, they are likely to settle (as have two of the four cases in whole or in part).

Because such cases rarely go to trial, there is a lack not only of judicial opinions on the legality of horizontal production restraints among agricultural producers, but also of publicly available economic analysis on the cost of such collusion. We examine the potato industry and conclude that coordinated production caps significantly increased the cost to buyers, with an average nationwide overcharge of 30.0% for fresh potatoes and 48.7% for Russet potatoes at the point of shipping, and 24.4% for fresh potatoes and 36.5% for Russet potatoes at the wholesale level. The social welfare costs are thus substantial.

This costly collusion has gone almost unexamined and unregulated. An analysis of the Capper-Volstead Act shows that it should be interpreted to encourage—not thwart—competition, and therefore, should not provide antitrust immunity to farmers who collude to restrict output.

Volume 11.3

Bankruptcy Beyond Status Maintenance

Govind Persad

This Article examines the tendency of current American bankruptcy law to maintain the social and economic status of middle- and upper-class debtors while doing much less to assist poorer debtors and non-debtors. In doing so, it examines and categorizes various aspects of statutory and case law that allow debtors to preserve their prior economic status. After reconstructing and rebutting the normative arguments offered in defense of these provisions, it suggests a proposal for reforming bankruptcy law to emphasize goals other than the maintenance of economic status.

Part I of the Article begins by describing ways in which current bankruptcy law serves to help debtors retain their pre-bankruptcy social and economic status, with a focus on exemptions from the bankruptcy estate. Part II then critically evaluates two types of arguments that defend the goal of helping debtors retain their prior social and economic status: one appeals to debtors’ claims, while the other appeals to societal interests. Part III proposes reorienting bankruptcy law away from the preservation of debtors’ part status and toward three interlocking goals: economic adequacy for debtors, economic freedom for debtors, and equal treatment for debtors and non-debtors. It also proposes some ways that this reorientation might be achieved.

Miranda Inc.: Corporations and the Right to Remain Silent

Robert E. Wagner

The right to remain silent is one of the most cherished and controversial rights that Americans have. The merits of this right have been debated for over two hundred years. Many supporters claim that it is the height of our civilization, and detractors claim that it only benefits the guilty and cannot be justified by a cost-benefit analysis. What has received little attention during this time is whether corporations should have the right to remain silent. An early Supreme Court case established that they do not. This Article asks why corporations do not have this right and whether that should remain true. The piece begins the discussion with an overview of corporate criminal liability, examining how the law treats a corporation that has engaged in illegal activity and what it means to say that a “corporation broke the law” in the first place. The Article then considers the constitutional standing of corporations and discusses the numerous constitutional rights that have been granted to them, followed by an analysis of the Fifth Amendment specifically and the arguments for and against the right to remain silent. The Article especially focuses on one of the more recent arguments in favor of a right to remain silent, namely that counter to the claim that the right only helps the guilty, it may in fact also prevent false convictions of the innocent. With this argument in mind, the piece turns to the ultimate question of whether corporations should have the right to remain silent. After showing that the original case law denying the right lacked substantive basis, the Article demonstrates that what little reasoning supported the denial of the right has been implicitly overruled in recent Supreme Court decisions. The Article concludes that given the unclear justifications for the modern right to remain silent and the applicability of some justifications to corporations, they should either receive the right to remain silent or it should be clearly established what goal the right is accomplishing and why that goal does not apply to corporations.

Crowdfunding Investment Contracts

Jack Wroldsen

This Article examines the first wave of crowdfunding investment contracts that were offered in the U.S. during the first month after crowdfunding investment became legal in May 2016. Assessing the earliest possible data sample of crowdfunding investment contracts is particularly important because crowdfunding investment platforms create influential path dependencies that drive start-up companies to use the standardized contract templates that the platforms promote. This paper provides a basis, grounding in actual crowdfunding investment contracts, for recommending improvements to the agreements that govern the emerging field of crowdfunding investments while also establishing a baseline from which to measure future evolution of crowdfunding investment contracting practices.

Initial crowdfunding investment offerings include contracts for six distinct types of investments: common stock, preferred stock, interest-bearing loans, revenue-sharing arrangements, convertible debt, and future equity. In addition, many of the initial crowdfunding investment offerings also include a rewards component, in the style of Kickstarter crowdfunding campaigns.

This Article’s analysis of each type of crowdfunding investment contract leads to four primary observations. First, crowdfunding investors may garner more practical protections from their collective leverage through social media than from formal contract rights. Second, crowdfunding investment intermediaries (i.e., websites known as funding portals) profoundly influence crowdfunding contracting practices by forging the standardized channels through which crowdfunding investments flow. Third, in the initial set of crowdfunding investment contracts, debt securities were significantly less likely to be offered than equity securities, and hybrid revenue-sharing securities were even less common, even though debt and revenue-sharing securities are well-suited for stable businesses with positive cash flows that seek investments from the crowd. Fourth, two new forms of simplified contracts—the “SAFE” and the “KISS,” which are specially tailored for crowdfunding investment offerings with high-growth potential—hold great promise, though not without drawbacks, for efficiently providing crowdfunding investors with the types of protections that venture capitalists typically demand when investing in seed-stage start-up companies.

Fool’s Gold? Equity Compensation & the Mature Startup

Abraham J.B. Cable

There are a record number of startups valued at $1 billion or more, but there are signs that these so-called unicorns (or “mature startups”) are faltering. Employees who are compensated with stock options may bear the brunt of these disappointments due to senior rights of managers and financial investors.

Private placement regulations are surprisingly lax when it comes to protecting employees as compared to other types of investors. While securities laws once followed other fields in considering employees to be vulnerable, the SEC has gradually relaxed regulation of equity grants to employees.

This Essay considers a fundamental question: are startup employees capable investors? The analysis reveals a counterintuitive possibility: startup employees may be relatively capable investors in a company’s early stages (when the risk of investment is sometimes perceived as highest), but poorly equipped to navigate the risks of a mature startup.