Securities Law Prof Blog

Colesanti on U.S. v. Finnerty

Not Dead Yet: How New York's Finnerty Decision Salvaged the Stock Exchange Specialist, by Scott Colesanti, Hofstra University School of Law, was recently posted on SSRN.  Here is the abstract:

In recent years, regulators of financial centers have attempted to criminalize practices traditionally and begrudgingly accepted by the market.
In 2007, a federal judge in the Southern District of New York effectively halted the government's attempts at prohibiting "interpositioning," a questionable strategy that challenges the ability of the stock exchange Specialist to concurrently serve both his own accounts and those of the public.
To wit, the publicized judgment notwithstanding the verdict of Judge Denny Chin in the Finnerty case raised many questions about prosecutors' application of S.E.C. Rule 10b-5 to trading behavior that had been noted for decades; in turn, the Judge's written decision revitalized the debate over the utility of market players (like Specialists) who have enjoyed the best seats on American exchange trading floors for almost 150 years.
Within the framework of a famed Broadway show, this article examines the case of U.S. v. Finnerty (while providing a history of the stock exchange Specialist) and a comparison to other cases faulting self-dealing by such professionals. In addition to highlighting the judicial questioning of the criminalization of practices normally incurring reprimands and fines, the article presents a framework for discussion of the primary roles of stock exchanges themselves - specifically, when do market centers owe a duty to their public customers, and when are its intermediaries free to fend for themselves?

Hill & Painter on Investment Bankers' Personal Liability

Berle's Vision Beyond Shareholder Interests: Why Investment Bankers Should Have (Some) Personal Liability, by Claire A. Hill, University of Minnesota, Twin Cities - School of Law, and Richard W. Painter,
University of Minnesota Law School, was recently posted on SSRN.  Here is the abstract:

This paper, published in a symposium on the work of Adolf Berle, approaches the Berle-Dodd debate from the perspective that corporate managers have responsibilities beyond pursuing the interests of shareholders. Stock based executive compensation, designed to align managers’ interests with those of shareholders, has, in the investment banking industry in particular, failed to avert, and may have caused, managers to take excessive risks that in the 2008 financial crisis inflicted great damage on creditors and on society as a whole. We describe here the broad outlines of a proposal that we will discuss in future publications in more detail to impose some measure of personal liability for a bank’s debts on the most highly paid bankers. The proposal would revive two mechanisms that imposed such personal liability in an earlier era: general partnership, which was common for investment banks prior to the 1980s, and assessable stock, which was relatively common in corporations including some commercial banks through the 1930s. One proposal is that bankers earning over $3 million per year be required to enter into a partnership/joint venture agreement with the employing bank that would make them personally liable for some of the bank’s debts. The other proposal is that compensation in excess of $1 million per year be paid to bankers only in stock that is assessable in the event of the bank’s insolvency in an amount equal to the book value of the stock on the date of issue. In either case, the bankers’ liability would not be unlimited: they would be allowed to shield $1 million from creditors. Imposing genuine downside risk through these or other vehicles for personal liability may be the best way to make bankers approach risk in a manner that reflects the potential for externalities of the sort the crisis has so dramatically demonstrated.

Nagy on Free Enterprise Fund v. PCAOB

Is the PCAOB a 'Heavily Controlled Component' of the SEC?: An Essential Question in the Constitutional Controversy, by Donna M. Nagy, Indiana University School of Law-Bloomington, was recently posted on SSRN.  Here is the abstract:

The U.S. Supreme Court will soon be hearing oral arguments in Free Enterprise Fund v. Public Company Accounting Oversight Board, described by D.C. Circuit Judge Brett Kavanaugh as “the most important separation-of-powers case regarding the President’s appointment and removal powers to reach the courts in the last 20 years.” Established by Congress as the cornerstone of the Sarbanes-Oxley Act of 2002, the PCAOB was structured as a strong, independent board in the private sector, to oversee the conduct of auditors of public companies.

This Article challenges the D.C. Circuit’s depiction of the PCAOB as “a heavily controlled component” of the SEC, and argues that this flawed premise was essential to the court’s 2-1 decision upholding the PCAOB’s constitutionality. With a focus on statutory analysis and legislative history, the Article seeks to show that Congress designed the PCAOB to operate with substantive independence from the SEC. It then argues that PCAOB members acting with significant discretion and autonomy outside the SEC’s control are “principal officers” who, pursuant to the Appointments Clause, must be appointed by the President with the advice and consent of the Senate. And as “principal officers” performing significant executive functions, PCAOB members must be removable for cause by the President.

Bebchuk et alia on Executive Compensation at Bear and Lehman

The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008, by Lucian A. Bebchuk, Harvard University - Harvard Law School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Alma Cohen, Tel Aviv University - Eitan Berglas School of Economics; Harvard Law School; National Bureau of Economic Research (NBER); and Holger Spamann, Harvard University - Harvard Law School, was recently posted on SSRN.  Here is the abstract:

The standard narrative of the meltdown of Bear Stearns and Lehman Brothers assumes that the wealth of the top executives of these firms was largely wiped out along with their firms. In the ongoing debate about regulatory responses to the financial crisis, commentators have used this assumed fact as a basis for dismissing both the role of compensation structures in inducing risk-taking and the potential value of reforming such structures. This paper provides a case study of compensation at Bear Stearns and Lehman during 2000-2008 and concludes that this assumed fact is incorrect.

We find that the top-five executive teams of these firms cashed out large amounts of performance-based compensation during the 2000-2008 period. During this period, they were able to cash out large amounts of bonus compensation that was not clawed back when the firms collapsed, as well as to pocket large amounts from selling shares. Overall, we estimate that the top executive teams of Bear Stearns and Lehman Brothers derived cash flows of about $1.4 billion and $1 billion respectively from cash bonuses and equity sales during 2000-2008. These cash flows substantially exceeded the value of the executives’ initial holdings in the beginning of the period, and the executives’ net payoffs for the period were thus decidedly positive. The divergence between how the top executives and their shareholders fared implies that it is not possible to rule out, as standard narratives suggest, that the executives’ pay arrangements provided them with excessive risk-taking incentives. We discuss the implications of our analysis for understanding the possible role that pay arrangements have played in the run-up to the financial crisis and how they should be reformed going forward.

Pildes on Free Enterprise Fund v. PCAOB

Separation of Powers, Independent Agencies, and Financial Regulation: The Case of the Sarbanes-Oxley Act, by Richard H. Pildes, New York University School of Law, was recently posted on SSRN.  Here is the abstract:

The Supreme Court will hear in December one of the most important separation-of-powers case in many years involving the structure of administrative agencies. The case, Free Enterprise Fund v. The Public Company Accounting Oversight Board, and this article, addresses virtually every major constitutional issue regarding the design of administrative governance: the line between principal and inferior officers of the United States; the appointment power; the removal power; separation of powers; and the status of independent agencies, including whether they can be "Departments" under the Constitution.
The case is a challenge to the constitutionality of the Sarbanes-Oxley Act, which Congress enacted in 2002 to address the corporate auditing debacles in cases such as Enron, WorldCom, and others. The Act's centerpiece was a new regulatory body, located within the Securities and Exchange Commission, with the power to regulate and oversee the accounting industry in the United States, under the supervision of the SEC. Judicial resolution of this conflict will determine not only the constitutionality of regulatory oversight of the accounting industry that Sarbanes-Oxley sets up. That resolution will determine the kinds of options Congress has for designing politically-insulated administrative structures to deal with the current financial crisis and with other major regulatory needs in the coming years.
This article analyzes these central constitutional issues in the context of the larger system of financial regulation. The analysis argues that the Sarbanes-Oxley Act and the new agency it creates is constitutional. This article is a substantially revised version, which addresses a number of new issues, of an earlier posted draft.

Acevedo on GAAP

The Fox and the Ostrich: Is GAAP a Game of Winks and Nods?, by Arthur Acevedo, The John Marshall Law School, was recently posted on SSRN.  Here is the abstract:

 
The fox is frequently described as sly, cunning and calculating in world literature. It is often associated with behavior that seeks advantage through trickery and pretext. The ostrich on the other hand, has been portrayed as cowardly and irrational. Its character defect is epitomized when it sticks its head in the sand at the first sign of trouble. The Financial Accounting Standards Board (FASB) can be described as the fox; the Securities Exchange Commission (SEC), the ostrich. This article examines the creation of accounting principles by the fox and the failure to govern by the ostrich. History demonstrates that the SEC adopted a policy of relying heavily on FASB in establishing accounting standards commonly known as generally accepted accounting principles (GAAP). However, neither FASB nor any of its predecessor organizations bear a responsibility of a public trust, nor any liability in the event of a breach of that trust. The SEC’s failure to establish accounting principles and constant reliance on private standard setters has contributed to the manipulation and exploitation of GAAP by corporations and their auditors. This article challenges the SEC’s policy of relying on third party standard setters such as FASB and calls upon the SEC to stop relying on private standard setters and start taking an active role in creating accounting standards. Only then, can it be said that the SEC is no longer sticking its head in the sand.

Ford on Principles-Based Securities Regulation

Principles-Based Securities Regulation in the Wake of the Global Financial Crisis, by Cristie L. Ford, University of British Columbia Faculty of Law; Columbia Law School, was recently posted on SSRN.  Here is the abstract:

This paper seeks to re-examine, and ultimately to restate the case for, principles-based securities regulation in light of the global financial crisis and related developments. Prior to the onset of the crisis, the concept of more principles-based financial regulation was gaining traction in regulatory practice and policy circles, particularly in the United Kingdom and Canada. The crisis of course cast financial regulatory systems internationally, including more principles-based approaches, into severe doubt. This paper argues that principles-based securities regulation as properly understood remains a viable and even necessary policy option, which offers solutions to the real-life and theoretical challenge that the GFC presents to contemporary financial markets regulation. That said, the global financial crisis illustrates how such outcome-oriented and devolved models can slide into self-regulation in the absence of meaningful regulatory oversight and engagement, and regulatory commitment to its publicly and systemically oriented role. Our response to the crisis should not be to re-embrace more rules-based regulatory approaches. Financial markets are too fast-moving and complex to be regulated in a command-and-control manner, and the risk of Enron-style “loophole behavior” associated with rules is too great. Instead, the paper draws on the lessons of the financial crisis to identify three critical success factors for effective principles-based securities regulation: considerable regulatory capacity (along four main parameters); an effective strategy for dealing with complexity (including the possibility of incorporating “prophlylactic rules” at strategic junctures); and adequate independence of mind and diversity of perspectives among regulators (meaning potentially a move away from an expertise-based, technocratic model toward a more broadly participatory one).

Agrawal & Nasser on Insider Trading in Takeover Targets

Insider Trading in Takeover Targets, by Anup Agrawal, University of Alabama - Culverhouse College of Commerce & Business Administration, and Tareque Nasser, University of Alabama, was recently posted on SSRN.  Here is the abstract:

Takeover announcements typically result in large increases in stock prices of target firms, providing a tempting opportunity for insider trading. Surprisingly, no prior study has examined whether the level and pattern of profitable insider trading before takeover announcements is abnormal for a broad cross-section of targets of takeovers during modern times. This paper brings large-sample evidence on this issue in an attempt to fill this gap in the literature. We examine insider trading in about 3,700 targets of takeovers announced during 1988-2006. We analyze open-market purchases, sales and net purchases of five groups of corporate insiders during the one year pre-takeover period. Using cross-sectional and time-series control samples, the paper estimates difference-in-differences regressions of several measures of the level of insider trading that control for its other determinants. We find an interesting and subtle pattern in the average pre-takeover trading behavior of target insiders. While insiders reduce both their purchases and sales below normal levels, their sales reduce more than purchases, leading to an increase in net purchases. This pattern of ‘passive’ insider trading is confined to the six-month period before takeover announcement, holds for each insider group, for all three measures of net purchases examined, and in certain sub-samples with less uncertainty about takeover completion, such as deals with a single bidder, domestic acquirer, and less regulated target. Our findings suggest that while insiders are careful about trading before major corporate events, they try to get around the restrictions on their trading activities.

Bhagat & Romano on Executive Compensation

Reforming Executive Compensation: Simplicity, Transparency and Committing to the Long-Term, by Sanjai Bhagat, University of Colorado at Boulder - Department of Finance, and Roberta Romano, Yale Law School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI), was recently posted on SSRN.  Here is the abstract:

This Article advances an executive compensation reform proposal that is specifically addressed to firms receiving government financial assistance and thought to pose a systemic risk, although we think that all firms should consider its adoption. Executive compensation reform should lead to policies that are simple, transparent, and focused on creating and sustaining long-term shareholder value. With these criteria in mind, we suggest that incentive compensation plans should consist only of restricted stock and restricted stock options, restricted in the sense that the shares cannot be sold nor the options exercised for a period of at least two to four years after an individual resignation or last day in office. We would permit a minor amount to be paid out to executives currently to address tax, liquidity, and premature turnover concerns that the proposal could induce. We believe that this approach will provide superior incentives for executives(and traders whose actions can substantially impact an organization) to manage firms in investors longer-term interest, and diminish their incentive to make public statements, manage earnings, or accept undue levels of risk, for the sake of short-term price appreciation. By reducing management incentive to take on unwarranted risk, our proposal would therefore also decrease the probability that public resources will be dissipated in bailouts of financial firms, particularly those deemed by public officials as “too big to fail.”

Higginbotham on Developing Policy for Disclosure

'See No Evil, Hear No Evil, Speak No Evil' - Developing a Policy for Disclosure by Counsel to Public Corporations, by F. Michael Higginbotham, University of Baltimore School of Law, was recently posted on SSRN.  Here is the abstract:

The purpose of this article is to develop policy and guidelines for counsel to observe when deciding whether and in what fashion he or she should disclose previously undisclosed information concerning an ongoing or future illegality committed by his or her corporate client. In developing these policies and guidelines, this article will discuss the current (1982) ABA policy and the relevant case law concerning corporate counsel's duty of disclosure, and proposed rules 1.13(b) and (c) of the 1980 ABA Discussion Draft and the 1981 Final Draft of Rules of Professional Conduct.

Coffee on Litigation Governance

Litigation Governance: Taking Accountability Seriously, by John C. Coffee Jr., Columbia Law School; European Corporate Governance Institute (ECGI); American Academy of Arts & Sciences, was recently posted on SSRN.  Here is the abstract:

Both Europe and the United States are rethinking their approach to aggregate litigation. In the United States, class actions have long been organized around an entrepreneurial model that uses economic incentives to align the interest of the class attorney with those of the class. But increasingly, potential class members are preferring exit to voice, suggesting that the advantages of the U.S. model may have been overstated. In contrast, Europe has long resisted the U.S.’s entrepreneurial model, and the contemporary debate in Europe centers on whether certain elements of the U.S. model - namely, opt-out class actions, contingent fees, and the “American rule” on fee shifting - must be adopted in order to assure access to justice. Because legal transplants rarely take, this Essay offers an alternative “non-entrepreneurial model” for aggregate litigation that is consistent with European traditions. Relying less on economic incentives, it seeks to design a representative plaintiff for the class action who would function as a true “gatekeeper,” pledging its reputational capital to assure class members of its loyal performance. Effectively, this model marries aspects of U.S. “public interest” litigation with existing European class action practice. Examining the differences between U.S. and European practice, this Essay argues none of these differences are dispositively prohibitive and that functional substitutes, including an opt-in class action and third party funding, could be engineered so as to yield roughly comparable results. Although the two systems might perform similarly in terms of compensation, the ultimate question, it argues, is the degree to which a jurisdiction wishes to authorize and arm a private attorney general to pursue deterrence for profit.

Rose on Multi-Enforcer Approach to Securities Fraud Deterrence

The Peril and Promise of a Multi-Enforcer Approach to Securities Fraud Deterrence: A Framework for Analysis, by Amanda M. Rose, Vanderbilt University Law School, was recently posted on SSRN.  Here is the abstract:

Participants in the United States’ national securities markets face potential fraud liability at the hands of the SEC, class action plaintiffs, and state regulators. Does this “multi-enforcer” approach to securities fraud deterrence make sense? How does one even go about answering that? This Article tackles the second question, filling a current void in the securities fraud literature by elucidating the circumstances that must prevail in order for a multi-enforcer approach to serve the cause of optimal deterrence. It thus situates debates over the preemption of state securities fraud enforcement authority and the desirability of private Rule 10b-5 enforcement within a framework of rational inquiry, and clarifies the empirical questions that must ultimately drive their resolution.

Black on Hewlett-Packard

The Story of Hewlett-Packard, by Barbara Black, University of Cincinnati - College of Law, was recently posted on SSRN.  Here is the abstract:

With the development of the modern corporation, corporate boards have been the locus of corporate authority, and particularly since the 1980s, boards and their performance have been under intense scrutiny. Nevertheless, corporate law has not developed a consistent theory for what boards are supposed to do; instead, it sends mixed messages about the functions and expectations of boards and the appropriate people to sit on them. The HP saga illustrates some of the dilemmas faced by directors confronted by these competing pressures.

Gross on Grounds to Challenge FINRA Arbitrators

Grounds to Challenge FINRA Arbitrators, by Jill Gross, Pace Law School, was recently posted on SSRN.  Here is the abstract:

This short article describes the grounds and processes parties can invoke to challenge the neutrality of arbitrators appointed to decide their disputes filed with FINRA Dispute Resolution, either pre-hearing or post-award.

Miller & Rosenfeld on Intellectual Hazard

Intellectual Hazard: How Conceptual Biases in Complex Organizations Contributed to the Crisis of 2008, by Geoffrey P. Miller, New York University - School of Law, and Gerald Rosenfeld, New York University - School of Law, was recently posted on SSRN.  Here is the abstract:

This paper identifies an important but previously unrecognized systemic risk in financial markets: intellectual hazard. Intellectual hazard, as we define it, is the tendency of behavioral biases to interfere with accurate thought and analysis within complex organizations. Intellectual hazard impairs the acquisition, analysis, communication and implementation of information within an organization and the communication of such information between an organization and external parties. We argue that intellectual hazard was a cause of the Crisis of 2008 and suggest that this risk may be an important factor in all financial crises. We offer tentative suggestions for reforms that might mitigate intellectual hazard going forward.

Siebecker on Trust & Transparency

Trust & Transparency: Promoting Efficient Corporate Disclosure Through Fiduciary-Based Discourse, by Michael R. Siebecker, University of Florida - Fredric G. Levin College of Law,  was recently posted on SSRN.  Here is the abstract:

Could embracing the philosophy of “encapsulated trust” as the basis for a fiduciary duty of disclosure improve the integrity and effectiveness of corporate communications? The question arises because a tragedy of transparency threatens the viability of the burgeoning corporate social responsibility (CSR) movement, where consumers and investors employ various social, environmental, or ethical screening criteria before purchasing a company‟s stock or products. In an efficient market, fully informed consumers and investors could reward companies that engage in CSR by purchasing their products or stock and, conversely, punish companies that fail to engage in desired practices by refusing to purchase their products or stock. Unfortunately, corporations are increasingly engaging in a sort of “strategic ambiguity” in their public communications-an ambiguity made possible by a variety of static yet inconsistent standards regarding the collection, auditing, and dissemination of information regarding CSR practices. Consumers and investors simply cannot trust the existing disclosure regime to provide reliable information necessary to monitor CSR compliance. That lack of trust will cause the market for CSR to collapse, as consumers and investors stop offering rewards for responsible business behavior.

The Article suggests solving that disclosure tragedy by using the philosophy of “encapsulated trust” to reshape the existing fiduciary duties governing officers and directors. In simple terms, encapsulated trust constitutes a rational expectation that others will take our interests into account when determining what course of action to pursue. Applied in the context of corporate disclosures on CSR, encapsulated trust would require officers and directors to demonstrate they took into account shareholder preferences regarding the timing, content, and form of corporate disclosures. In essence, the duty is a process-based standard that relies on continual discourse to improve the integrity of disclosure practices. In contrast to static statutory disclosure rules, an emphasis on improved discourse between the corporations and shareholders would promote greater efficiency in corporate communication by attending more accurately to evolving consumer and investor disclosure preferences. Moreover, the focus on greater discourse within the corporate setting would also lead to enhanced ethical practices by corporate actors and their counsel.

Reuveni on Extraterritoriality of the Securities Laws

Extraterritoriality as Standing: A Standing Theory of the Extraterritorial Application of the Securities Laws, by Erez Reuveni, United States Second Circuit Court of Appeals, was recently posted on SSRN.  Here is the abstract:

This Article contends that the current treatment of the extraterritorial scope of the 1934 Securities and Exchange Act as a question of subject matter jurisdiction is wrong. Although the Act is silent as to its extraterritorial application, for over forty years courts have analyzed the Act’s extraterritorial scope as a question of subject matter jurisdiction, relying on the so-called “conduct” and “effects” tests. Because courts apply these tests in an ad hoc, case-by-case manner, they are inherently unpredictable and unnecessarily complicated. This state of affairs has become particularly troublesome in recent years, as so-called “foreign-cubed” securities fraud lawsuits - lawsuits filed by foreign plaintiffs against foreign defendants, alleging fraud in connection with the sale or purchase of shares in foreign markets - have proliferated in federal courts. This Article argues that contrary to current practice, the extraterritorial reach of Section 10(b) and Rule 10b-5 of the 1934 Act is really a question of statutory standing. Under the analysis developed here, the appropriate question for courts to ask is not whether they have jurisdiction over foreign claims, but whether Congress intended for the statutory scheme to provide a remedy to foreign plaintiffs. As this Article shows, only foreign investors who purchase or sell stock in the United States have standing to invoke the securities laws. This approach resolves the problems inherent in jurisdictional analysis and provides a simple, easily understood bright-line rule whose predictive value and procedural benefits ensure an optimal enforcement regime where American interests are affected by foreign fraud.

Ferrarini & Miller on Takeover Regulation

A Simple Theory of Takeover Regulation in the United States and Europe, by Guido A. Ferrarini, University of Genoa - Law School; European Corporate Governance Institute (ECGI), and Geoffrey P. Miller, New York University - School of Law, was recently posted on SSRN.  Here is the abstract:

This paper presents a simple model of takeover regulation in a federal system. The theory has two parts. First, the model predicts that the rules applicable at more general political levels will be more favorable to takeover bids than will the rules applicable at local levels. The reason is that unlike bidders, who do not know ex ante where they will find targets, targets can concentrate their political activities knowing that the law of their jurisdiction will apply to any attempt to take them over. On the other hand, at more general political levels this advantage for target firms disappears, so the rules are expected to be less target-friendly. This is in fact the pattern we observe both in the United States and the European Union. Second, the model predicts that rules on takeovers will reflect the degree of concern that targets have about potential hostile bids. Where firms are well-protected against unfriendly takeovers – for example, in jurisdictions where companies are under family control – takeover regulation is likely to be less target-friendly than in jurisdictions where potential targets are more exposed to a hostile acquisition. This pattern is also observed in takeover regulation.

Laby on Reforming Regulation of Brokers and Advisers

Reforming the Regulation of Broker-Dealers and Investment Advisers, by Arthur B. Laby, Rutgers University School of Law - Camden, was recently posted on SSRN.  Here is the abstract:

A key component of financial regulatory reform is harmonizing the law governing broker-dealers and investment advisers. Historically brokers charged commissions and were regulated under the Securities Exchange Act of 1934. Advisers charged asset-based fees and were subject to the Investment Advisers Act of 1940, which contains a special exclusion for brokers. In recent years, brokers have changed their compensation structure and many now market themselves as advisers, raising questions about whether they should be treated as such. The Obama Administration’s 2009 White Paper on regulatory reform and draft legislation call for a fiduciary duty to be imposed on brokers that provide advice. In this article, I explore the debate over regulating brokers and advisers and suggest how to resolve it. I make four key claims. First, changes in brokers’ compensation and marketing methods vitiate application of the broker-dealer exclusion and should subject brokers to the Advisers Act. Second, changes in the nature of brokerage, spurred by changes in technology, make the broker-dealer exclusion unsustainable and Congress should repeal it. I then turn to the consequences of regulating brokers as advisers. The third claim is that imposing fiduciary duties on brokers is incompatible with their historical roles as dealers and underwriters. To resolve this tension, the article suggests a compromise that enhances brokers’ duties but does not hobble their ability to perform their traditional functions. Finally, regulating brokers as advisers would overburden the SEC and the article offers alternatives to alleviate the strain.

Subramanian et al. on the Constitutionality of Delaware's Antitakeover Statute

Is Delaware's Antitakeover Statute Unconstitutional? Evidence from 1988-2008, by Guhan Subramanian, Harvard Business School; Steven Herscovici, Analysis Group, Inc.; and Brian Barbetta, Analysis Group, Inc., was recently posted on SSRN.  Here is the abstract:

Delaware’s antitakeover statute, codified at Section 203 of the Delaware corporate code, is by far the most important antitakeover statute in the United States. When it was first enacted in 1988, three bidders challenged its constitutionality under the Commerce Clause and the Supremacy Clause of the U.S. Constitution. All three federal district court decisions upheld the constitutionality of Section 203 at the time, relying on empirical evidence indicating that Section 203 gave bidders a “meaningful opportunity for success,” but leaving open the possibility that future empirical evidence might change this constitutional conclusion. This Article presents the first systematic empirical evidence since 1988 on whether Section 203 gives bidders a meaningful opportunity for success. The question has become more important in recent years because Section 203’s substantive bite has increased, as Exelon’s recent hostile bid for NRG illustrates. Using a new sample of all hostile takeover bids against Delaware targets that were announced between 1988 and 2008 that were subject to Section 203 (n=60), we find that no hostile bidder in the past nineteen years has been able to avoid the restrictions imposed by Section 203 by going from less than 15% to more than 85% in its tender offer. At the very least, this finding indicates that the empirical proposition that the federal courts relied upon to uphold Section 203’s constitutionality is no longer valid. While it remains possible that courts would nevertheless uphold Section 203’s constitutionality on different grounds, the evidence would seem to suggest that the constitutionality of Section 203 is up for grabs. This Article offers specific changes to the Delaware statute that would preempt the constitutional challenge. If instead Section 203 were to fall on constitutional grounds, as Delaware’s prior antitakeover statute did in 1986, it would also have implications for similar antitakeover statutes in thirty-two other U.S. states, which along with Delaware collectively cover 92% of all U.S. corporations.