HBLR PRINT

VOLUME 8.1

Can Restitution Save Fragile Spiderless Networks?
Ariel Porat & Robert E. Scott

This Article examines the dramatic increase in business networks in recent decades and considers whether the law can play a useful role in supporting the efficient functioning of these inter-firm relationships for coordination and cooperation. We show how in theory the law could support spiderless networks by allowing firms who externalize benefits to other firms in the network to recover for those benefits. Practical considerations may limit the implementation of a full-blown right of restitution. Nevertheless, by recognizing a limited right to recover for uncompensated costs and benefits in appropriate cases, the law can function as a background norm for sharing costs and benefits among network members, motivating them to overcome daunting coordination problems. We consider several implementation issues, show how they might be resolved, and apply our analysis to a set of well-known spiderless networks.

Concentrated Ownership and Long-Term Shareholder Value
Albert H. Choi


Corporate ownership structure with a controlling shareholder is widespread around the world. Conventional accounts of concentrated ownership warn against controlling shareholders’ abusive exercise of control and extraction of “private benefits” at the expense of minority shareholders. These accounts, however, are in sharp contrast with the success achieved by many firms with concentrated ownership and the resurgent popularity of dual class structure (which separates voting rights from rights to profits) with uncontested control, as evidenced by Google, Facebook, and many others. This Article attempts to reconcile the empirical evidence with the existing theory by demonstrating how a moderate amount of private benefits of control can actually enhance long- term value by inducing commitment and investment by the controlling shareholder. 

Is Say on Pay All about Pay? The Impact of Firm Performance
Jill Fisch, Darius Palia & Steven Davidoff Solomon


The Dodd-Frank Act of 2010 mandated a number of regulatory reforms including a requirement that large U.S. public issuers provide their shareholders with the opportunity to cast a non-binding vote on executive compensation. The “say on pay” vote was designed to rein in excessive levels of executive compensation and to encourage boards to adopt compensation structures that tie executive pay more closely to performance. Although the literature is mixed, many studies question whether the statute has had the desired effect. Shareholders at most issuers overwhelmingly approve the compensation packages, and pay levels continue to be high. Although a lack of shareholder support for executive compensation is relatively rare, say on pay votes at a number of issuers have reflected low levels of shareholder support. A critical question is what factors drive a low say on pay vote. In other words, is say on pay only about pay? In this Article, we examine that question by looking at the effect of three factors on voting outcomes—pay level, sensitivity of pay relative to economic performance, and economic performance. 

Inefficient Tailoring: The Private Ordering Paradox in Corporate Laws
Michal Barzuza

The conventional wisdom in corporate law posits that private ordering has an important virtue: it allows firms to efficiently tailor governance terms to their particular needs. This virtue is routinely advanced to justify the largely “enabling” structure of U.S. corporate law, and to oppose “one-size-fits-all” mandatory regulation.
This Article argues that private ordering frequently produces inefficient tailoring of corporate governance terms—firms that need governance constraints are precisely the ones that do not volunteer to implement them. In theory, the conventional approach assumes that these firms will implement constraints voluntarily because otherwise they would be disciplined by market forces. Yet such reliance on market discipline has an inherent paradox: the firms that would benefit most from governance constraints are precisely the ones that are subject to weak market discipline.

HBLR ONLINE

VOLUME 8

Blurring the Edges of Corporate Law: Insider Trading and the Martoma Decision
Azfer A. Khan

June 1, 2018

In its recent decision, the Second Circuit in United States v. Martoma overturned key aspects of its decision in United States v. Newman. Justifying this departure based on the Supreme Court’s ruling in Salman v. United States, the majority in Martoma held that there is no requirement to prove a meaningfully close personal relationship in order to find liability for insider trading under Rule 10b-5. While Martoma ostensibly changed the test for tippee liability, this Article argues that the substantive outcome for most insider trading cases is likely to remain unaffected. However, because Martoma expanded the scope of tippee liability, more claims can now get into court. This expansion should be resisted under the traditional Santa Fe doctrine because it threatens to blur the distinction between corporate law and securities law. This Article first provides a quick roadmap to insider trading law, then dives into an analysis of Martoma and the decisions immediately preceding it, and concludes by offering perspectives on what the likely impact of the decision will be.

Sidestepping the Rat Holes: Investment Risk and Securities Laws
Thomas M. Selman

April 21, 2018

This Article presents a novel understanding of the purpose of federal securities laws as the management of investment risk. Those laws should be treated as a whole. When two rules, even under different statutes, address the same risk, they should be applied concomitantly. For example, broker-dealer regulation under the Securities Exchange Act of 1934 might justify relaxation of prospectus delivery requirements in the Securities Act of 1933.
 
 

How Do I Sell My Crowdfunded Shares? Developing Exchanges and Markets to Trade Securities Issued by Start-ups and Small Companies
Janet Austin

January 28, 2018

Governments worldwide are increasingly recognizing that assisting the development of start-ups and small to medium enterprises may be critical to fostering job creation and economic growth. As such, there is a concerted effort to rework securities regulation to encourage the funding of these businesses through innovative approaches such as crowdfunding. There are a number of over-the-counter, venture and small company markets trying to bridge that gap. However, such markets present significant regulatory challenges. This Article considers these regulatory challenges and explores how regulators can work to improve the integrity of these markets as a way of encouraging their development.

Bullish on Blockchain: Examining Delaware’s Approach to Distributed Ledger Technology in Corporate Governance Law and Beyond
Wonnie Song

January 3, 2018

The buzz around blockchain is getting ever louder. Increased legislative response is perhaps the clearest signal yet that blockchain technology may be more than a passing fad. Several jurisdictions in the United States have amended their state laws to explicitly legitimize the use of blockchain technology in both commerce and corporate governance. With a focus on Delaware’s embrace of blockchain technology, this Article examines the potential role of distributed ledgers in corporate governance and capital market transactions. The Article then considers the solutions such technology offers, as well as some barriers its advocates might face in pursuing its wide-scale adoption.

The High Cost of Fewer Appraisal Claims in 2017: Premia Down, Agency Costs Up
Matthew Schoenfeld

January 2, 2018

This Article considers the preliminary results of an ongoing effort to discourage appraisal litigation. Since the August 2016 reforms to the Delaware appraisal statute, Chancery has issued a slew of at-or-below merger price appraisal opinions in cases such as Clearwire and PetSmart, while simultaneously reiterating the principles of Corwin. The result—as one would expect when costs are raised and benefits are reduced—has been that fewer deals are being challenged via appraisal. The evidence points to a substantial transfer of value from target shareholders to selling CEOs, who have adapted to an environment rendered more permissive by the weakening of the shareholder litigation “check” that had formerly restrained such behavior.