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Abstract

American corporations have a long history of carelessness and Caremark has made it difficult for shareholders to recover against them for it. In 2018, for example, the world discovered that Donald Trump had wrongfully collected the personal data of up to 87 million Facebook users. Facebook’s failure to address the unchecked collection and use of users’ data cost the company more than $50 billion in market capitalization alone. Despite clear losses, shareholder litigation has thus far been unsuccessful. The normal governmental response to such corporate failures of oversight is to saddle corporations with more federal oversight, even though this purely reactive behavior has consistently failed to curb corporate misconduct. The consequence for regulated firms is thus an ever-increasing cost of compliance with no marked change in behavior. Meanwhile, shareholders are left with few options for recovery because, in the face of asymmetrical information, there is insufficient evidence to meet onerous pleading requirements found in state and federal laws such as Caremark.

This Article proposes a better solution—the use of federal administrative determinations as presumptive evidence of corporate mismanagement. It describes the existing limitations of both SEC and common law-based protections in the context of shareholder derivative litigation for lapses in oversight, explores the factual commonalties of those plaintiffs that have been successful in this area, and proposes that Delaware can preempt corporate misbehavior, while reducing the need for more federal oversight, by relying on federal administrative fact-finding combined with the Caremark standard to promote shareholder successes in derivative litigation. Corporate law scholarship rarely acknowledges its intersection with administrative law. Thus, scholars have not considered the possibility that shareholders can easily rely on the determinations of federal agencies to establish evidence of a director’s failure of oversight under Caremark.

When campaigning for his progressive income tax, Illinois Gov. J.B. Pritzker argued it was needed to address “income inequality” and fund education and social services.

Although voters rejected the tax hike, Pritzker has succeeded in reducing income inequality without it. He did so by driving away the state’s wealthiest person.

Billionaire investor Ken Griffin and his family are moving to Florida.

Read the full piece here.

Abstract

If a company misbehaves, lawsuits are one way of providing a remedy and encouraging that company and others to behave in the future. If the misbehavior is securities fraud, there are two potential plaintiffs—traders allegedly injured by the fraud may bring a private suit, and the government (through the SEC or DOJ) may sue to enforce the public interest in truthful disclosures of corporate information. If the misbehavior is violations of corporate governance rules, however, only private suits are available. Despite the parallel rationales for marrying private and public attorneys general, the toolkit for protecting the public interest in corporate governance is not as well stocked. This essay imagines what a government cause of action might look like for alleged corporate governance wrongdoing. Many of the pathologies of current corporate governance litigation may be ameliorated by a state-based, public cause of action for breaches of fiduciary duty. Although not without downsides, putting Delaware’s Corporate Governance Police on the beat may improve the governance of American companies, while reducing the amount of vexatious litigation.

ICLE Editor-in-Chief R.J. Lehmann joined the Heard Tell Show to discuss Elon Musk’s bid to buy Twitter, shareholder rights, platform moderation, and regulatory review of the transaction. The full episode is embedded below.

https://youtu.be/6uhTJL6g9uY?t=835

Abstract

The institution of bankruptcy law seeks to facilitate economic efficiency by enabling the reorganization of economically viable but financially distressed firms and facilitating the liquidation of economically failed firms. Does the U.S. Chapter 11 bankruptcy process perform this filtering function efficiently? Using data from large public bankruptcies between 1981-2010, we find that it does not. Specifically, (1) evidence on matched performance differences between bankrupt firms and industry counterparts indicate that there is no improvement in the performance gap between bankrupt firms and industry right before and after bankruptcy, and, (2) firms emerging from bankruptcy do not exhibit financial performance catch-up behavior to their going concern industry counterparts. In addition, we find (3) judicial bias in favor of reorganization in cases involving firms with more employees and operations closer to the judge’s district, suggesting that bankruptcy judges respond to social-political considerations, when deciding whether to reorganize the firm.

Abstract

Legal rights impose concomitant legal burdens. This paper considers the valuation and disposition of legal rights, and legal burdens, when courts cannot be relied upon to perfectly enforce rights. Because courts do not perfectly enforce rights, victims suffer some loss in the value of their rights depending on the degree of underenforcement. The welfare implications of trading away and abandoning rights are examined. Victims do not necessarily trade away rights when and only when such trade is socially desirable. Relatively pessimistic victims (who believe their rights are weaker than injurers do) trade away rights too cheaply. Extremely pessimistic victims abandon their rights. Implications for the enforceability of waivers, discrimination in courts, and legal ethics are discussed.

Abstract

Collective action at impersonal scale involves losses to autonomy by definition because of the need to centralize some measure of authority. This stands as an important cost to collective action that varies in predictable ways depending on the extent of organizational choice available to members. By identifying characteristics at the fundamental institutional level linked to increases in self-determination relative to other organizational forms, I identify a structural tradeoff between exit costs and constitutional constraints with respect to the ideal of unanimity. Despite the long recognition of these institutional features as central to the processes of human social ordering, my analysis is centered in how each institutional solution to representative losses to collective decision making at scale reduces these losses relative to the other. As exit costs decrease, the losses to self-determination that collective action poses are increasingly resolved through individual choice, which makes the need for costly constitutional constraints fall in comparison. In a world of zero collective action costs, organizational choice would be infinite, and the initial distribution of organizations would always dynamically adjust to optimally reflect every individual’s preferences. But because collective action costs are never zero, some measure of constitutional constraints are therefore always optimal in the governance of impersonal organizations due to the representative losses these organizations entail.

Abstract

When parties bring claims under investor-state dispute settlement (‘ISDS’) procedures, who should serve as decision-maker? Relevant par-ties ask the question in different settings and with different criteria in mind. A party in a dispute, contemplating ISDS proceedings, whether by it or against it, likely will focus on the qualities of particular individuals available to serve as arbitrators. Party-appointed panelists charged under the applicable instrument with choosing a neutral or chair, and institutional appointing authorities charged with that task or with choosing arbitrators in default of party choice, will also turn their minds to candidate assessment. Different individuals or institutions might look for somewhat different qualities, but all who are called upon to make the choice will think about how best to assess the candidates.

Abstract

Mandatory disclosure requirements for corporate supply chains have the potential to leverage consumer and investor sensibilities to incentivize corporations to source more ethically. Despite their growing prevalence, there are few empirical studies of their effects: whether they actually put pressure on companies remains untested. This Article supplies such evidence by examining the consumer and investor responses to corporate supply chain disclosures made pursuant to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The act requires publicly traded companies to disclose to the Securities and Exchange Commission whether their supply chain contains “conflict minerals” (minerals important in global supply chains whose sourcing supports the conflict in the Democratic Republic of Congo and surrounding areas). The law aims to give customers and investors information about corporate supply chains, with the hope that they will support companies that source responsibly and punish those that do not. But whether this is actually accomplished is an open question.

This Article provides an empirical study of the market responses to three years of Section 1502 disclosures, whose contents were coded to create a novel dataset. Disclosures implying that a company has a higher risk of contributing to the conflict are associated with higher revenues and stock performances than those implying a lower risk. This implies there is no market discipline of bad actors in response to the disclosures; instead, bad actors are rewarded. This is consistent with the finding that the number of companies reporting a higher risk of contributing to the conflict through their supply chains did not decrease over the three years. One potential explanation is that consumers and investors may read disclosures more for signals of a corporation’s honesty or profit-maximization skills than for information about conflict-minerals exposure, and firms disclosing a higher risk of this exposure are more likely to be honest and profit seeking. Because disclosures about supply chains will generally send these signals as well, expecting investors or consumers to discipline the supply chains in response to securities disclosures is unrealistic. But scores for the due diligence procedures and forward-looking commitments in the disclosures generated by an NGO for a subset of the companies are positively correlated with revenues, suggesting how mandatory disclosure regimes might be improved. The NGO’s success in disseminating and analyzing the information suggests that the SEC may not be the best actor for implementing supply chain disclosure requirements and the criteria for the scoring suggest that disclosure requirements should focus more on the reporting of processes so that they are less likely to send a signal about honesty.