Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Thursday, May 2, 2013

DU Online Law Review Devotes Issue to JOBS Act

J. Robert Brown Jr., University of Denver Sturm College of Law, announces that:

The DU Online Law Review has devoted an entire issue to the JOBS Act (available at . The content came from eight students under faculty supervision. The papers each analyzed a specific provision in the JOBS Act and relied upon a common format. The papers addressed the law as it existed on the eve of the JOBS Act and analyzed the changes implemented by Congress, including the relevant legislative history. Each paper offered practical insight into the operation of the selected statute.

The papers encompassed significant portions of the JOBS Act. Three addressed crowdfunding (Lindsay Anderson Smith, Crowdfunding and Using Net Worth to Determine Investment Limits, Lina Jasinskaite, The JOBS Act: Does the Income Cap Really Protect Investors? and Michael W. Shumate, Crowdfunding and State Level Securities Fraud Enforcement under the JOBS Act), two addressed the changes to the private placement process under Rule 506 (Erica Siepman, The JOBS Act and the Elimination of the Ban on General Solicitations and Samuel Hagreen, The JOBS Act: Exempting Internet Portals from the Definition of Broker-Dealer ), and one addressed the number of shareholders of record that trigger registration with the SEC (Susan Beblavi, The JOBS Act Title V: Raising the Threshold for Registration), emerging growth companies (Will McAllister, The JOBS Act Title I: The “On-Ramp” to IPOs for Emerging Growth Companies) and Regulation A (David Rodman, Regulation A , the JOBS Act, and Public Offering Lite).

May 2, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Saturday, April 27, 2013

Alexander on Cyberfinancing for Economic Justice

Cyberfinancing for Economic Justice, by Lisa T. Alexander, University of Wisconsin Law School, was recently posted on SSRN.  Here is the abstract:

This article argues for the socially optimal regulation of online peer-to-peer (P2P) lending and crowdfunding to advance economic justice in the United States. Peer-to-peer lending websites, such as or, facilitate lending transactions between individuals online without the involvement of a traditional bank or microfinance institution. Crowdfunding websites, such as, enable individuals to obtain financing from large numbers of contributors at once through an open online request for funds. These web-based transactions, and the intermediary organizations that facilitate them, constitute emerging cyberfinancing markets. These markets connect many individuals at once, across class, race, ethnicity, nationality, space, and time in an interactive and dynamic way. During a time of significant economic distress in the United States, these markets also represent an unprecedented economic development opportunity for historically marginalized economic actors. Yet, no legal scholar has addressed the implications of these developments for economic justice in the United States. Drawing from the fields of law and geography, social networking theory, and comparative institutional analysis, this Article conceptualizes these new markets as "cyberspaces," similar to geographic spaces, whose laws, norms, and rules will partially determine who will benefit from the economic opportunities that arise in these spaces. The recently enacted Jumpstart Our Business Startups (JOBS) Act does not facilitate substantial distributive justice in crowdfunding markets. The U.S. Government Accountability Office (GAO), which produced a report in response to the 2010 Dodd-Frank Wall Street Reform Act's mandate that it study the P2P lending industry, has also failed to recommend a regulatory structure that will facilitate economic justice. This Article recommends that a range of federal regulators such as the U.S. Securities and Exchange Commission(SEC), the new Consumer Financial Protection Bureau (CFPB), and the U.S. Treasury Department (Treasury), should collaborate to implement a revised Community Reinvestment Act (CRA) that would promote economic justice in these markets

April 27, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Brams & Mitts on M&A Auctions

Mechanism Design in M&A Auctions, by Steven J. Brams, New York University (NYU) - Wilf Family Department of Politics, and Joshua Mitts, Yale Law School, was recently posted on SSRN.  Here is the abstract:

The recent controversy over “Don’t Ask, Don’t Waive” standstills in M&A practice highlights the need to apply mechanism design to change-of-control transactions. In this Essay, we propose a novel two-stage auction procedure that induces honest bidding among participants while potentially yielding a higher sale price than an open ascending, a sealed-bid first price, or a Vickrey second-price auction. Our procedure balances deal certainty with value maximization through the Nobel Prize-winning principle of incentive compatibility, making participation in the M&A auction and honest disclosure of reservation prices in the parties’ interests rather than relying solely on heavy-handed ex-post enforcement. Moreover, the social benefits of our two-stage auction mechanism - greater transparency regarding the distribution of bids, avoidance of the winner’s curse, certainty in the M&A auction environment, and fairness to buyers and sellers - justify reduced judicial scrutiny of transactions utilizing the procedure under Revlon and Chancellor Strine’s recent dicta in

April 27, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Heminway on Funding For-Profit Social Enterprises

To Be or Not to Be (a Security): Funding For-Profit Social Enterprises, by Joan MacLeod Heminway, University of Tennessee College of Law, was recently posted on SSRN.  Here is the abstract:

This article explores the federal securities law status of financial interests in for-profit social enterprise entities. When analyzed through the lens of the Securities Act of 1933 and the Securities Exchange Act of 1934, financial interests in social enterprise businesses raise both concerns and opportunities. Ultimately, the federal securities regulation status of interests in for-profit social enterprise ventures is important for choice-of-entity reasons (since the regulatory framework may impose different costs on interests in different structural business forms), for capital-structuring reasons within individual forms of entity, and for risk-management reasons at the entity level. In addition, an inquiry into the applicability of federal securities regulation to the funding of social enterprise serves as a catalyst for further thought on the optimal applicability of federal securities regulation to interests in business entities and projects.

April 27, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Cunningham on Deferred Prosecution and Corporate Governance

Deferred Prosecutions and Corporate Governance: An Integrated Approach to Investigation and Reform, by Lawrence A. Cunningham, George Washington University Law School, was recently posted on SSRN.  Here is the abstract:

When evaluating how to proceed against a corporate investigative target, law enforcement authorities often ignore the target’s governance arrangements, while subsequently negotiating or imposing governance requirements, especially in deferred prosecution agreements. Ignoring governance structures and processes amid investigation can be hazardous and implementing improvised reforms afterwards may have severe unintended consequences — particularly when prescribing standardized governance devices. Drawing, in part, on new lessons from three prominent cases — Arthur Andersen, AIG and Bristol-Myers Squibb — this Article criticizes prevailing discord and urges prosecutors to contemplate corporate governance at the outset and to articulate rationales for prescribed changes. Integrating the role of corporate governance into prosecutions would promote public confidence in prosecutorial decisions to broker firm-specific governance reforms currently lacking and increase their effectiveness. The Article, therefore, contributes a novel perspective on the controversial practice: though substantial commentary urges prosecutors to avoid intruding into corporate governance, this Article explains the importance of prosecutors investing in it.

April 27, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Sunday, April 14, 2013

Bebchuk on the Myth of Insulating Boards

The Myth that Insulating Boards Serves Long-Term Value, by Lucian A. Bebchuk, Harvard Law School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI), was recently posted on SSRN.  Here is the abstract:

According to a central and influential view in corporate law writings and debates, shareholder interventions, and the fear of such interventions, lead companies to take myopic actions that are costly in the long term; consequently, it is claimed, insulating boards from such pressure serves the long-term interests of companies as well as of their shareholders. This board insulation claim has been regularly invoked in a wide range of contexts to support limits on shareholder rights and involvement, and has had considerable success and influence. In this paper, I subject this view to a comprehensive examination, and I find it wanting.

In contrast to what insulation advocates commonly assume, short investment horizons and imperfect market pricing do not imply that board insulation will be value-increasing in the long term. I show that, even assuming such short horizons and imperfect pricing, shareholder activism, and the fear of shareholder intervention, will produce not only long-term costs but also some significant countervailing long-term benefits.

Furthermore, there is a good basis for concluding that, on balance, the negative long-term costs of board insulation exceeds its long-term benefits. To begin, the behavior of informed market participants reflects their beliefs that shareholder activism, and the arrangements facilitating it, are overall beneficial for the long-term interest of companies and their shareholders. Moreover, a review of the available empirical evidence provides no support for the claim that board insulation is overall beneficial in the long term; to the contrary, the body of evidence favors the view that shareholder engagement, and arrangements that facilitate it, serve the long-term interests of companies and their shareholders.

I conclude that the claims made by insulation advocates have a shaky conceptual foundation and are not supported by the data. Policy makers and institutional investors should reject arguments for board insulation in the name of long-term value.

April 14, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Skeel & Jackson on Dynamic Resolution of Large Financial Institutions

Dynamic Resolution of Large Financial Institutions, by David A. Skeel Jr., University of Pennsylvania Law School; European Corporate Governance Institute (ECGI), and Thomas H. Jackson, University of Rochester, was recently posted on SSRN.  Here is the abstract:

One of the more important issues emerging out of the 2008 financial crisis concerns the proper resolution of a systemically important financial institution. In response to this, Title II of Dodd-Frank created the Orderly Liquidation Authority, or OLA, which is designed to create a resolution framework for systemically important financial institutions that is based on the resolution authority that the FDIC has held over commercial bank failures. In this article, we consider the various alternatives for resolving systemically important institutions. Among these alternatives, we discuss OLA, a European-style bail-in process, and coerced mergers, while also extensively focusing on the bankruptcy code. We argue that implementing several discrete modifications to Dodd-Frank, as well adopting an ambitious Chapter 14 proposal written by a working group at the Hoover Institution is the best way forward for establishing a strong resolution framework.

April 14, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Cunningham Podcast on Warren Buffett & Corporate Governance

Lawrence Cunningham (George Washington Law) has a podcast, Inside Track with Broc: Larry Cunningham on Warren Buffett's View of Governance & Securities Law (4/8/13).  In this podcast, Larry discusses the Third Edition of "The Essays of Warren Buffett: Lessons for Corporate America" (the first version dates back to 1997 and actually began as a law review conference) as it applies to corporate governance and securities regulation, including:

•What are some of the venerable principles of corporate governance that reappear in this edition?
•What's new for Warren concerning corporate governance?
•Who does Warren think was responsible for the financial crisis and how has responsibility been apportioned?
•What about compliance and assuring integrity through the ranks?
•For Warren, what's the toughest battle to fight in terms of compliance?
•What's the appropriate response when improprieties are found?

April 14, 2013 in Law Review Articles, Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Baer on Baker & Griffith's Ensuring Corporate Misconduct

Some Thoughts on the Porous Boundary between Ordinary and Extraordinary Corporate Fraud (Book Review of ENSURING CORPORATE MISCONDUCT by Tom Baker and Sean J. Griffith, 2010), by Miriam H. Baer, Brooklyn Law School, was recently posted on SSRN.  Here is the abstract:

This is a book review of Tom Baker and Sean Griffith’s 'Ensuring Corporate Misconduct'. Their book provides an exhaustive and illuminating analysis of how corporations contract for director and officer (D&O) liability insurance. Based on extensive interviews with insurance carriers and corporate risk officers, Baker and Griffith conclude that D&O liability insurance has created a moral hazard within the public corporation. Managers, who have incentives to take advantage of shareholders, are inadequately deterred by civil liability for securities fraud because D&O insurance effective shields them from any payout. Accordingly, Baker and Griffith argue for reforms that would reduce this moral hazard.

Baker and Griffith’s arguments are persuasive and should make any reader think twice about the value of D&O insurance. Their critique, however, seems to make light of the fact that corporate fraud can trigger criminal investigations, and ultimately criminal penalties for individuals who engage in or conspire to commit fraud. Although the authors agree that D&O insurance provides no protection against criminal penalties and investigations, they nevertheless presume that much of the conduct that gives rise to civil securities fraud litigation (so-called “ordinary fraud”) is unlikely to trigger criminal and public enforcement proceedings. This Review questions whether there in fact exists such a distinct boundary between “ordinary” and “extraordinary” corporate frauds. To the contrary, one would expect the rational corporate officer to be wary that any fraud case might trigger an investigation by public enforcers. If that is the case, then the porous boundary between criminal and civil fraud may lessen Baker and Griffith’s rightful concerns about moral hazard. With these thoughts in mind, the Review then addresses several of Baker and Griffith’s proposed reforms.

April 14, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Sunday, April 7, 2013

Krug on Entity-Centrism in Financial Services Regulation

Escaping Entity-Centrism in Financial Services Regulation, by Anita K. Krug, University of Washington School of Law, was recently posted on SSRN.  Here is the abstract:

In the ongoing discussions about financial services regulation and its proper goals, implementation, and enforcement — encompassing considerations on how best to protect clients and customers and under what circumstances markets function most effectively — one critically important topic has not been recognized, let alone addressed. That topic is what this Article calls the “entity-centrism” of financial services regulation. Laws and rules are entity-centric when they assume that financial services firms are stand-alone entities, operating separately from and independently of any other entity. They are entity-centric, therefore, when the specific requirements and obligations they comprise are addressed only to an abstract and solitary “firm,” with little or no contemplation of affiliates, parent companies, subsidiaries, or multi-entity enterprises. Moreover, regulatory entity-centrism is not an isolated phenomenon, as it permeates the laws and rules that govern a firm’s becoming regulated, the substantive requirements to which the firm must adhere, and the firm’s ultimate insolvency or liquidation. In addition, entity-centrism does not discriminate among financial services activities: it can be discerned in laws and rules covering investment advisers, broker-dealers, futures commission merchants, mutual funds and other registered investment companies, and beyond. In other words, entity-centrism in financial services regulation is pervasive. It is also deeply problematic.

This Article is the first scholarly work to call attention to entity-centrism as manifested in financial services regulation, to show why entity-centrism counters regulatory objectives, and to assess possible explanations for it. The Article does so primarily through evaluating two recent regulatory failures, namely, the bankruptcy of MF Global, a large futures brokerage firm that became insolvent in late 2011, and the Ponzi scheme orchestrated by the Stanford Financial Group, which came to light in 2009. These case studies reveal how entity-focused laws and rules privilege entity boundaries over the various ways in which multiple entities (or entities and individuals) work together as a common enterprise. In particular, they show how entity-centrism, by insisting that the subject and/or beneficiary of regulatory obligations is cohesive and complete in-and-of itself, ignores how the interests that regulation exists to further may be situated outside the entity, leaving those interests unprotected. The case studies also demonstrate that entity-centrism ignores how actors outside the entity may use the entity to manipulate or escape regulatory obligations, again leaving the relevant interests without the protections that regulation contemplates. Accordingly, this Article contends that financial services regulation should look past entity boundaries and that lawmakers and regulators should think more broadly, critically, and creatively to address the persistent and significant regulatory difficulties that entity-centrism has spawned.

April 7, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Cunningham & Greenberg on AIG

The AIG Story (Chapter 18, Nationalization), by Lawrence A. Cunningham, George Washington University Law School, and Maurice R. Greenberg, Starr International Company, Inc, was recently posted on SSRN.  Here is the abstract:

This is the final chapter of The AIG Story, a book about the growth of a large international insurance company that pioneered the opening of new markets and helped forge milestone international trade agreements, followed by an account of its near-destruction, first at the hands of an overzealous state attorney general and underwhelming board of directors, and then, as detailed in this chapter, at the hands of federal government officials overwhelmed by a financial crisis they could not understand. This chapter begins in mid-2008, when AIG’s losing financial products bets presented the company with a huge liquidity problem, though it commanded nearly a trillion dollars in assets that made it entirely solvent. The world’s largest banks faced both liquidity and solvency problems that threatened a global financial meltdown. Swooping into the maelstrom, the U.S. Treasury and New York Fed engineered a solution that portrayed AIG as the greatest villain of the crisis and its treatment by the government as a rescue of the company. The truth is more complex and this chapter of the book explains, in what Kirkus has aptly described, reviewing the book, as “a useful contribution to the ongoing shaping of the story of the recent financial crisis.”

April 7, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Badawi on Merger Class Actions and Multi-Jurisdictional Litigation

Merger Class Actions in Delaware and the Symptoms of Multi-Jurisdictional Litigation, by Adam B. Badawi, Washington University in Saint Louis - School of Law, was recently posted on SSRN.  Here is the abstract:

Recent research on corporate litigation has focused on three trends: the growth in percentage of mergers that result in litigation, the migration of cases away from Delaware, and the increasing prevalence of merger litigation occurring simultaneously in multiple jurisdictions. This Symposium Article uses a new and unique dataset of public company litigation to track how these trends have affected filings and litigation tactics in the Delaware Court of Chancery from 2004 to 2011. The data confirm that Delaware appears to have experienced a decline in filings during the early and middle periods of the sample, but the data also shows that there has been a sharp increase in the number of the number of acqusition-related cases filed in Delaware in 2010 and 2011.

The rise of concurrent, multi-jurisdictional litigation and the litigation tactics that it encourages are the likely reasons for the growth of acquisition-related cases in Delaware. While some plaintiffs’ attorneys may have left Delaware to escape the Chancery’s threats of lower attorneys’ fees and merit-based selection of lead counsel, in the current environment a Delaware filing may provide strategic advantages as foreign jurisdictions become saturated with filings. For example, lawyers may try to take control of a case by moving for expedited proceedings in Delaware or they may try to complicate negotiations over the selection of lead plaintiffs’ counsel. The threat of using these tactics may increase the possibility that a plaintiff will receive some share of a fee award either in Delaware or in a case being litigated elsewhere.

This article explores how the rules Delaware uses to manage deal cases may enable strategic behavior in the context of multi-jurisdictional litigation. This discussion provides reasons to believe that the use of tactics such as requesting expedited proceedings, contesting consolidation of cases, and involving out-of-state counsel earlier in proceedings should increase as multi-jurisdictional litigation increases. The empirical evidence provides substantial support for these theories. The article concludes with an assessment of how the observed increase in strategic tactics may affect debates over how and whether to respond to the rise of multi-jurisdictional litigation.

April 7, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Schwarcz on Transactional Lawyers and Shadow Banking

Lawyers in the Shadows: The Transactional Lawyer in a World of Shadow Banking, by Steven L. Schwarcz, Duke University - School of Law, was recently posted on SSRN.  Here is the abstract:

This article, which is based on the author’s keynote address at an April 5, 2013 conference at American University Washington College of Law on “Transactional Lawyering: Theory, Practice, & Pedagogy,” examines the role of transactional lawyers in a world of shadow banking. By reducing the dominance of banks as financial intermediaries, shadow banking has transformed the financial system, causing transactional lawyers to face an array of novel issues. This article focuses on one of those issues: to what extent should transactional lawyers address the potential systemic consequences of their client’s actions? First, the article shows that the legal system itself inadvertently enables or requires firms operating as shadow banks to engage in uniquely risky behavior, without protecting against the resulting systemically risky externalities. That finding, in turn, broadens the legal ethics inquiry to two issues: what duty should transactional lawyers have to try to improve the legal system to protect against those externalities, and what duty should transactional lawyers have to try to prevent those externalities, assuming the legal system is not improved.

April 7, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Sunday, March 31, 2013

Jeng on the JOBS Act

The JOBS Act: Rule 506, Crowdfunding, and the Balance between Efficient Capital Formation and Investor Protection, by Daniel H. Jeng, Boston University School of Law, was recently posted on SSRN.  Here is the abstract:

With great fanfare, the Jumpstart Our Business Startups Act, popularly known as the "JOBS Act", passed through Congress and, on April 15, 2012, earned President Obama's approval. This paper offers a review of the Act, delving into its historical background, purpose, and important titles. Title II amends Rule 506 of Regulation D to lift the prohibition of general solicitation and general advertising. Title III enables "equity crowdfunding", a novel and controversial fundraising method. These two titles expand capital formation channels to both accredited investors and to the "ordinary American investor". The struggle to strike the optimal balance between efficient capital formation and strong investor protection animates both Title II and Title III provisions as well as rule-making by the Securities and Exchange Commission. This paper offers four qualities that characterize the "ideal JOBS Act startup": 1) a smaller capital requirement; 2) a shorter timeline for success and product development; 3) a simple fundamental idea and business model; and 4) the elusive human element.

March 31, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Choudhary et al. on Compliance with SEC Disclosure Rules

Boards, Auditors, Attorneys, and Compliance with Mandatory SEC Disclosure Rules, by Preeti Choudhary, Georgetown University; Jason D. Schloetzer, Georgetown University - McDonough School of Business; and Jason Sturgess, Georgetown University - Robert Emmett McDonough School of Business, was recently posted on SSRN.  Here is the abstract:

We survey the empirical literature on the determinants of firms’ compliance with mandatory SEC disclosure rules. We begin with a discussion of the role of boards of directors, public accounting firms, and corporate attorneys in the preparation and review of mandatory disclosures. We then organize current research into three broad types of variation in compliance: completeness, timeliness, and readability. Our review highlights three interesting areas for future research: (1) studies that examine the relations between completeness, timeliness, and readability within the same research design, (2) studies that assess whether boards of directors, public accounting firms, and corporate attorneys view disclosure compliance as a general firm policy, and (3) studies that investigate the influence of corporate attorneys on mandatory disclosure, as well as studies of disclosure issues that require collaboration between auditors and corporate attorneys. As a first step to address the latter agenda, we provide new empirical evidence regarding the impact of corporate attorneys on disclosure compliance.

March 31, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Roe on Short-Termism

Corporate Short-Termism - In the Boardroom and in the Courtroom, by Mark J. Roe, Harvard Law School; European Corporate Governance Institute (ECGI), was recently posted on SSRN.  Here is the abstract:
A long-held view in corporate circles has been that furious rapid trading in stock markets has been increasing in recent decades, justifying more judicial measures that shield managers and boards from shareholder influence, so that boards and managers are freer to pursue sensible long-term strategies in their investment and management policies.

Here, I evaluate the evidence in favor of that view and find it insufficient to justify insulating boards from markets further. While there’s evidence of short-term distortions, the view is countered by several under-analyzed aspects of the American economy, each of which alone could trump the board isolation prescription. Together they make the case for further judicial isolation of boards from markets untenable. First, even if the financial markets were, net, short-term oriented, one must evaluate the American economy from a system-wide perspective. As long as venture capital markets, private equity markets, and other conduits mitigate, or reverse, much of any short-term tendencies in public markets, then the purported problem is local but not systemic. Second, the evidence that the stock market is, net, short-termist is inconclusive, with considerable evidence that stock market sectors often overvalue the long term. Third, mechanisms inside the corporation are important sources of short-term distortions and the impact of these internal short-term favoring mechanisms would be exacerbated by further judicial insulation of boards from markets. Fourth, courts are not well positioned to make this kind of basic economic policy, which if determined to be a serious problem is better addressed with policy tools wider than those available to courts. And, fifth, the widely held view that short-term trading has increased dramatically in recent decades may over-interpret the data; the duration for holdings of many of the country’s major stockholders, such as mutual funds like Fidelity and Vanguard, and major pension funds, does not seem to have shortened. Rather, a high-velocity trading fringe has emerged, and its rise affects average holding periods, but not the holding period for the country’s ongoing major stockholding institutions.

The view that stock market short-termism should affect corporate lawmaking fits snugly with two other widely supported views. One is that managers must be isolated from stock markets to run the firm well. Whatever the value of this view, short-termism provides no further support for managerial insulation from financial markets. The insulation argument must stand or fall on its own. Similarly, those who argue that employees, customers, and other stakeholders are due more consideration in corporate governance point to pernicious short-termism to further support their view. Again, the best view of the evidence is that the pro-stakeholder view must stand on its own. It gains no further evidence-based, conceptual support from a purported short-termism in financial markets. Overall, system-wide short-termism in public firms is something to watch for carefully, but not something that today should affect corporate lawmaking.

March 31, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Morley on Separation of Investments and Management

The Separation of Investments and Management, by John Morley, University of Virginia School of Law, was recently posted on SSRN.  Here is the abstract:

This paper suggests a basic shift in the way we think about investment funds. The essence of these funds and their regulation lies not just in the nature of their investments, as is widely supposed, but also and more importantly in the nature of their organization. All types of investment funds — including hedge funds, private equity funds, venture capital funds, mutual funds, exchange-traded funds and closed-end funds — adopt a structure that I term “the separation of investments and management.” Investment enterprises place all of their investment assets into a “fund” with one set of owners, and all of their managers, workers and operational assets into a “management company” or “adviser” with a different set of owners. Investment funds also radically limit investors’ control, sometimes eliminating voting rights and boards of directors entirely. This pattern of organization has never been clearly explained or identified as a common feature of investment funds, but it has often worried and confused commentators and was recently the subject of a case in the U.S. Supreme Court. This paper explains this pattern by showing how it limits fund investors’ control over their managers and exposure to their managers’ profits and liabilities. Investors benefit from these limits for a combination of reasons having to do with exit rights, risk management and the economies of scale that managers can achieve by operating multiple funds. This pattern of organization is a large part of what defines investment funds and animates their regulation.

March 31, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Sunday, March 24, 2013

Sitkoff on Fiduciary Obligations of Financial Advisors

The Fiduciary Obligations of Financial Advisors Under the Law of Agency, by Robert H. Sitkoff, Harvard Law School, was recently posted on SSRN.  Here is the abstract:

This paper considers how agency fiduciary law might be applied to a financial advisor with discretionary trading authority over a client's account. It (i) surveys the agency problem to which the fiduciary obligation is directed; (ii) examines the legal context by considering how the fiduciary obligation undertakes to mitigate this problem; and (iii) examines several potential applications of agency fiduciary law to financial advisors, including principal trades and the role of informed consent by the client, organizing the discussion under the great fiduciary rubrics of loyalty and care. This paper was sponsored by Federated Investors, Inc.

March 24, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Fleischer & Staudt on The Supercharged IPO

The Supercharged IPO, by Victor Fleischer, University of Colorado Law School; University of San Diego, and Nancy C. Staudt, USC Gould School of Law, was recently posted on SSRN.. Here is the abstract:
A new innovation on the IPO landscape has emerged in the last two decades, allowing owner-founders to extract billions of dollars from newly-public companies. These IPOs — labeled supercharged IPOs — have been the subject of widespread debate and controversy: lawyers, financial experts, journalists, and Members of Congress have all weighed in on the topic. Some have argued that supercharged IPOs are a “brilliant, just brilliant,” while others have argued they are “underhanded” and “bizarre.”

In this article, we explore the supercharged IPO and explain how and why this new deal structure differs from the more traditional IPO. We then outline various theories of financial innovation and note that the extant literature provides useful explanations for why supercharged IPOs emerged and spread so quickly across industries and geographic areas. The literature also provides support for both legitimate and opportunistic uses of the supercharged IPO.

With the help of a large-N quantitative study — the first of its kind — we investigate the adoption and diffusion of this new innovation. We find that the reason parties have begun to supercharge their IPO is not linked to a desire to steal from naïve investors, but rather for tax planning purposes. Supercharged IPOs enable both owner-founders and public investors to save substantial amounts of money in federal and state taxes. With respect to the spread of the innovation, we find that elite lawyers, especially those located in New York City, are largely responsible for the changes that we observe on the IPO landscape. We conclude our study by demonstrating how our empirical findings can be used to 1) advance the literature on innovation, 2) assist firms going public in the future, and 3) shape legal reform down the road.

March 24, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Bruner on Director's Duty of Care

Is the Corporate Director's Duty of Care a 'Fiduciary' Duty? Does it Matter?, by Christopher M. Bruner, Washington and Lee University - School of Law, was recently posted on SSRN.  Here is the abstract:

 While reference to "fiduciary duties" (plural) is routinely employed in the United States as a convenient short-hand for a corporate director's duties of care and loyalty, other common-law countries generally treat loyalty as the sole "fiduciary duty." This contrast prompts some important questions about the doctrinal structure for duty of care analysis adopted in Delaware, the principal jurisdiction of incorporation for U.S. public companies. Specifically, has the evolution of Delaware's convoluted and problematic framework for evaluating disinterested board conduct been facilitated by styling care a "fiduciary" duty? If so, then how should Delaware lawmakers and judges respond moving forward?

I argue that styling care a "fiduciary" duty has impacted Delaware's duty of care analysis in ways that are not uniformly positive. Historically, loyalty has been aggressively enforced, while care has hardly been enforced at all - the former approach aiming to deter conflicts of interest through probing analysis of "entire fairness," while the latter aims to promote entrepreneurial risk-taking through a hands-off judicial posture embodied in the business judgment rule. Conflation of these differing concepts as "fiduciary duties," however, has facilitated a tendency toward over-enforcement of care, periodically threatening to impair entrepreneurial risk-taking until arrested by a countervailing legislative or judicial response. Additionally, their conflation threatens to erode the duty of loyalty by fueling the contractarian argument that the sole utility of such "fiduciary duties" is to fill contractual gaps, and that corporations therefore ought to possess latitude to "opt out" of loyalty to the degree already permitted with respect to care.

While I concede that there may be good reasons not to abruptly recharacterize Delaware's duty of care as "non-fiduciary," I conclude that the analytical problems described in this essay can otherwise be remedied only through a statutory provision more clearly distinguishing these differing duties and enforcement strategies. Specifically, I advocate a statutory damages rule declaring once and for all that monetary damages may be imposed on a corporate director for care, but not loyalty, breaches - an approach effectively discarding much of Delaware's multi-layered and convoluted mode of care analysis, while insulating the duty of loyalty from future erosion.

March 24, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)