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.