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HBLR PRINT
VOLUME 10.2
HOW HORIZONTAL SHAREHOLDING HARMS OUR ECONOMY—AND WHY ANTITRUST LAW CAN FIX IT
Einer Elhauge
Empirical evidence that horizontal shareholding has created anticompetitive effects in airline and banking markets have produced calls for antitrust enforcement. In response, others have critiqued the airline and banking studies and argued that antitrust law cannot tackle any anticompetitive effects from horizontal shareholding. I show that new economic proofs and empirical evidence, ranging far beyond the airline and banking studies, show that horizontal shareholding in concentrated markets often has anticompetitive effects. I also provide new analysis demonstrating that critiques of the airline and banking market level studies either conflict with the evidence or, when taken into account, increase the estimated adverse price effects from horizontal shareholding. Finally, I provide new legal theories for tackling the problem of horizontal shareholding. I show that when horizontal shareholding has anticompetitive effects, it is illegal not only under Clayton Act §7, but also under Sherman Act §1. In fact, the historic trusts that were the core target of antitrust law were horizontal shareholders. I further show that anticompetitive horizontal shareholding also constitutes an illegal agreement or concerted practice under EU Treaty Article 101, as well as an abuse of collective dominance under Article 102. I conclude by showing that horizontal shareholding not only lessens the market concentration that traditional merger law can tolerate, but also means that what otherwise seem like non-horizontal mergers should often be treated as horizontal. Those implications for traditional merger analysis become even stronger if we fail to tackle horizontal shareholding directly.Empirical evidence that horizontal shareholding has created anticompetitive effects in airline and banking markets have produced calls for antitrust enforcement. In response, others have critiqued the airline and banking studies and argued that antitrust law cannot tackle any anticompetitive effects from horizontal shareholding. I show that new economic proofs and empirical evidence, ranging far beyond the airline and banking studies, show that horizontal shareholding in concentrated markets often has anticompetitive effects. I also provide new analysis demonstrating that critiques of the airline and banking market level studies either conflict with the evidence or, when taken into account, increase the estimated adverse price effects from horizontal shareholding. Finally, I provide new legal theories for tackling the problem of horizontal shareholding. I show that when horizontal shareholding has anticompetitive effects, it is illegal not only under Clayton Act §7, but also under Sherman Act §1. In fact, the historic trusts that were the core target of antitrust law were horizontal shareholders. I further show that anticompetitive horizontal shareholding also constitutes an illegal agreement or concerted practice under EU Treaty Article 101, as well as an abuse of collective dominance under Article 102. I conclude by showing that horizontal shareholding not only lessens the market concentration that traditional merger law can tolerate, but also means that what otherwise seem like non-horizontal mergers should often be treated as horizontal. Those implications for traditional merger analysis become even stronger if we fail to tackle horizontal shareholding directly.
COMPETING FOR VOTES
Kobi Kastiel & Yaron Nili
Shareholder voting matters. It can directly shape a corporation’s governance, operational and social policies. But voting by shareholders serves another important function—it produces a marketplace for votes where management and dissidents compete for the votes of the shareholder base. The competition over shareholder votes generates ex ante incentives for management to perform better, to disclose information to shareholders in advance, and to engage with large institutional investors.
Traditional corporate law has looked to a variety of “market forces” as a means of curbing the agency costs of public corporations. Yet, for various rea- sons, these market forces are, at best, an incomplete answer to the agency costs associated with public corporations. This Article is the first to develop a theory of a new force that may have a better chance at curbing managerial entrenchment—the competition for votes. In a world where shareholder voting is becoming increasingly powerful, and where highly incentivized and sophisticated players, such as hedge funds, aggressively court the support of fellow shareholders, the importance of active competition for votes cannot be understated.
The Article empirically depicts the emergence of a vibrant competition for votes, outlines its major building blocks, and explains how to further facilitate its operation. The policy implications of our analysis are wide-ranging, casting new light on several hotly contested governance debates such as the legitimacy of dual-class shares, shareholder activism, the role of passive investors, and the role of proxy advisors..
ARTIFICIAL FINANCIAL INTELLIGENCE
William Magnuson
Recent advances in the field of artificial intelligence have revived long- standing debates about the interaction between humans and technology. These debates have tended to center around the ability of computers to exceed the capacities and understandings of human decisionmakers, and the resulting effects on the future of labor, inequality, and society more generally. These questions have found particular resonance in finance, where computers already play a dominant role. High-frequency traders, quantitative (or “quant”) hedge funds, and robo-advisors all represent, to a greater or lesser degree, real-world instantiations of the impact that artificial intelligence is having on the field. This Article, however, takes a somewhat contrarian position. It argues that the primary danger of artificial intelligence in finance is not so much that it will surpass human intelligence, but rather that it will exacerbate human error. It will do so in three ways. First, because current artificial intelligence techniques rely heavily on identifying patterns in historical data, use of these techniques will tend to lead to results that perpetuate the status quo (a status quo that exhibits all the features and failings of the external market). Second, because some of the most “accurate” artificial intelligence strategies are the least transparent or explain- able ones, decisionmakers may well give more weight to the results of these algorithms than they are due. Finally, because much of the financial industry depends not just on predicting what will happen in the world, but also on predicting what other people will predict will happen in the world, it is likely that small errors in applying artificial intelligence (either in data, programming, or execution) will have outsized effects on markets. This is not to say that artificial intelligence has no place in the financial industry, or even that it is bad for the industry. It clearly is here to stay, and, what is more, has much to offer in terms of efficiency, speed, and cost. But as governments and regulators begin to take stock of the technology, it is worthwhile to consider artificial intelligence’s real- world limitations.
FEDERAL FORUM PROVISIONS AND THE INTERNAL AFFAIRS DOCTRINE
Dhruv Aggarwal, Albert H. Choi, & Ofer Eldar
A key question at the intersection of state and federal law is whether corporations can use their charters or bylaws to restrict securities litigation to federal court. In December 2018, the Delaware Chancery Court answered this question in the negative in the landmark decision Sciabacucchi v. Salzberg. The court invalidated “federal forum provisions” (“FFPs”) that allow companies to select federal district courts as the exclusive venue for claims brought under the Securities Act of 1933 (“1933 Act”). The decision held that the internal affairs doctrine, which is the bedrock of U.S. corporate law, does not permit charter and bylaw provisions that restrict rights under federal law. In March 2020, the Delaware Supreme Court overturned the Chancery’s decision in Salzberg v. Sciabacucchi, holding that in addition to “internal” affairs, charters and bylaws can regulate “intra-corporate” affairs, including choosing the forum for Securities Act claims.
This Article presents the first empirical analysis of federal forum provisions. Using a hand-collected data set, we examine the patterns of adoption of such provisions and the characteristics of adopting firms. We show that adoption rates are higher for firms with characteristics, such as belonging to a particular industry, that make them more vulnerable to claims under the 1933 Act. We also show that adoption rates substantially increased after the Supreme Court decision in Cyan Inc. v. Beaver County Employees Retirement Fund, which validated concurrent jurisdiction for both federal and state courts for 1933 Act claims. We also find that the firms that adopt FFPs at the initial public offering (“IPO”) stage tend to share characteristics that have been associated with relatively good corporate governance. To assess the impact of the Sciabacucchi decision, we also conduct an event study. We find that the decision is associated with a large negative stock price effect for companies that had FFPs in their charters or bylaws. The effect is robust even for firms that had better governance features, that underpriced their stock at the IPOs, and whose stock price traded at or above the IPO price prior to the Sciabacucchi decision.
In light of the empirical findings suggesting that federal forum provisions may serve shareholders’ interests by mitigating excessive 1933 Act litigation, we consider alternative legal theories for validating federal forum provisions in corporate charters and bylaws. We suggest two possible approaches: (1) al- lowing corporate charters and bylaws to address matters that are technically external but deal with the “affairs” of the corporation; and (2) adopting a more “flexible” internal affairs doctrine that could view 1933 Act claims as being “internal” to a corporation’s affairs. The Delaware Supreme Court’s decision can be viewed as being more consistent with the first, rather than the second, approach. We examine the possible implications of adopting either approach, particularly with respect to mandatory arbitration provisions and the existing Delaware statute on exclusive forum provisions.
HBLR ONLINE
VOLUME 10
Truth
Max Stul Oppenheimer†
The internet has spawned two major policy debates: the extent and control of protection of personal data privacy, and the impact and control of interference in public policy, most notably elections.
On the one hand, there is a concern that social media privacy controls are deficient and that personal data is being shared without informed consent, while the increased speed and reduced costs of data processing has enabled aggregating fragments of personal information into detailed personal dossiers.
On the other hand, there is a concern that lack of information about sources of information in social media fosters propagation of false information that can influence elections.
In this article, I argue that proposed solutions to these two problems are incompatible— providing greater protection of personal data will make it more difficult to protect against meddling in elections, while requiring, in effect, censorship of political posts will make it more difficult to respect privacy concerns. I begin in Section II by identifying the common phenomenon that has brought both problems into focus: increased speed and decreased cost of data collection and transfer and how it exacerbates the concerns. I then summarize in Section III the concerns over control of personal data and proposed solutions, focusing in particular on recent problems at Facebook and how they argue in effect for a right to anonymity. In that section I also introduce the constitutional basis for anonymity, found in the First Amendment. I then summarize in Section IV the more recent concerns over the proliferation of false information on social media, focusing in particular on recent problems with election meddling and how they argue against a right to anonymity. In that section I also explore the elusive definition of “truth”, comparing approaches under a sampling of statutes and introduce the limited role that truth plays in determining First Amendment protections. I also explain how identifying the source of information is an important element of distinguishing between fact and fiction and of evaluating the weight to be given to opinion and how anonymity hinders achieving those goals. Finally, I introduce the complication of corporate speech and the impact of recent Supreme Court cases on the rights of corporations. In Section V, I conclude that direct regulation of political speech on social media is unlikely to succeed and propose instead that the solution lies in the First Amendment itself—promotion of more speech.
† Professor, University of Baltimore School of Law; B.S., Princeton University; J.D., Harvard Law School.
Rules for Principles and Principles for Rules: Tools for Crafting Sound Financial Regulation
Heath P. Tarbert
The fundamental objective for any government agency overseeing financial markets and institutions should be sound regulation. And how we regulate is just as important as what we regulate. Every major financial regulator in the world employs, to varying degrees, two primary methods of regulation: principles-based and rules-based. In this article, I discuss the key advantages of each of these forms of regulation. I also offer some considerations for determining when a principles-based, a rules-based, or hybrid approach to regulation is the most appropriate. That is to say, I outline a number of “rules for principles” and “principles for rules” for achieving sound regulation. Finally, I consider some real-world applications of this framework as applied to our modern and increasingly digital markets.
As the Chairman of the Commodity Futures Trading Commission (CFTC or Commission), my focus will be on the CFTC and its agenda. Among my goals is reinvigorating the CFTC’s primarily principles-based approach to regulation where appropriate. Such an approach can provide enormous flexibility in rulemaking and enable the CFTC—the world’s premier derivatives regulator—to stay ahead of the curve by reacting more quickly to changes in technology and the marketplace. At the same time, I consider the circumstances where a more prescriptive, rules-based approach is preferable. In pursuing this endeavor, I have been able to build on the work and ideas of a number of former CFTC Commissioners and Chairs of diverse backgrounds and political affiliations.
At the outset, I note that in developing this analytic framework and applying it to concrete regulatory initiatives, I have been guided by Aristotle’s maxim on methodology: “Our discussion will be adequate if it has as much clearness as the subject-matter admits of, for precision is not to be sought for alike in all discussions. . . .” Evaluating the factors that lead us to a more principles- based or rules-based regulatory approach is dependent on facts and circumstances that are, by their nature, complex and subject to change. We should therefore resist the urge to demand more certainty from this inquiry than it admits.
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Human Rights Rhetoric in Global Internet Governance: New ICANN Bylaw on Human Rights
Monika Zalnieriute
As part of a significant institutional reform in global governance of the Internet, the Internet Corporation for Assigned Names and Numbers (“ICANN”)—an internationally organised multi-stakeholder body that secures the operation of the Domain Name System (“DNS”) globally—has recently included a “Core Value” of “respect for internationally recognised human rights” in its Bylaws. Since the DNS is integral for navigating and browsing the Internet, policies governing its operation have enormous human rights implications at the global level. After more than three years of multi-stakeholder deliberations over the appropriate Framework of Interpretation (FOI) for the new Core Value, ICANN Board has finally approved it in November 2019, taking one crucial step forward towards the implementation of its newly pronounced human rights aspirations. This article critically examines ICANN’s latest human rights rhetoric and argues that the new aspirations in the Bylaws are drafted in a way that they carry little, if any, legal weight. I will further show that the new aspirations in the Bylaws are much weaker than the quasi-constitutional, self-imposed commitments in ICANN’s founding documents—the Articles of Incorporation. ICANN has proved to be reluctant to comply with those self-imposed commitments in the past; and I argue that it is, therefore, unlikely to convert its novel human rights rhetoric into practice. This raises questions about the extent of its commitment to human rights values, and whether the new Core Value amounts to little more than a veneer intended to bolster ICANN’s public image and confidence in light of the ongoing institutional reforms in Internet Governance.
Many national and subnational units of government see a need for more inclusive money, payment, and retail banking systems for the capture, storage, and transfer of spendable value among their constituents. Existing and still proliferating payments platforms, most provided by for-profit private sector entities, exclude too many people, and extract too much value in the form of needless transaction charges and other rents, to be up to the task of efficiently affording this essential commercial and financial utility to the full public on sensible terms. This Article sketches a smart-device-accessible platform— the ‘Digital Dollar Platform Plan’—which, thanks to new payment technologies, can easily be put in to place and administered by any unit or level of government with a view to supplying this critical commercial and financial infrastructure to all of its constituents.
Human Leadership in a Highly Regulated and Tech-Reliant Corporate Environment
Timo Matthias Spitzer, LL.M. (Wellington)
We are living in times of drastic change and global legal, economic, and political turmoil, hoping for the best but expecting the worst. A focus on the shareholder may drive managers toward profit maximization, often with limited incentives to include environmental, governance, and social factors into corporate decisions. Crises show the need for human leadership with integrity to realign companies with stakeholders besides the shareholder, including the wider society.
Neither the regulator nor technology can replace the need for human leadership with integrity. As to supervision and best-in-class compliance policies, overregulation may even prevent directors from seeing the forest for the trees, and hamper their abilities to make moral judgment calls, as it is impossible to regulate all possible scenarios in advance. Technology supports cost- efficiency, but an irresponsible reliance may even be dehumanizing, as programs can reflect values of software developers, and artificial intelligence may inadvertently adopt societal bias, contributing to a moral dilemma.
International corporate governance codes – as exemplarily analyzed herein – recognize the advantages of moving toward a wider stakeholder inclusion, but such codes serve as recommendations only when they are unbinding in nature. To achieve a lasting solution, it would require introducing a legal entity model, which includes all relevant stakeholders in the company’s decision-making process. However, this would require material corporate law reforms, which are difficult to achieve and implement in the short-term and in the current climate.
As a practical solution, the elevation of the General Counsel (GC) as a strong and independent leader to the C-suite level would support the Chief Executive Officer (CEO) in achieving corporate sustainability through leadership with integrity. Such promotion would enhance the role of the GC as a proactive business partner and ultimately a protector of the corporation. The revised responsibility would still include assessing legal and compliance matters but extend toward assisting the CEO in strategy, budgeting, governance, human resources, and other key matters for the company.
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Cybersecurity Provisions in Trade Agreements: The State of the Art
Chimène I. Keitner & Harry L. Clark
Virtually without exception, conducting business across borders today means being connected to the Internet. The U.S.-Mexico-Canada Trade Agreement (USMCA), which is awaiting implementation by Congress, would become the first operative United States free trade agreement to include a chapter devoted to “digital trade.”[1] The USMCA provisions on digital trade build on the electronic commerce chapter in the Trans-Pacific Partnership (TPP, now CPTPP)—a multilateral trade agreement that the Obama Administration negotiated, but the Trump Administration rejected.[2] As the United States continues to negotiate the conditions for its bilateral trade relationships, cybersecurity concerns are likely to feature in the discussions.
As a general matter, trade agreements seek to reduce barriers to cross-border trade. The prospect of negotiating a trade agreement can be used as a “carrot” in foreign relations, whereas punitive measures such as sanctions and tariffs are used as “sticks.” Meanwhile, growing concerns about cybersecurity and the perceived risks posed by foreign technology and foreign control over data create pressures for more trade-restrictive arrangements. This essay examines provisions relating to digital trade and cybersecurity against the backdrop of these potentially competing interests. We begin by describing current efforts to address cybersecurity-related concerns in trade treaties, with a focus on the USMCA. Next, we address concerns at the intersection of cybersecurity and national security. Third, we identify an apparent trend towards company-specific arrangements rather than global regimes. Finally, we offer an assessment of current efforts to use trade treaties to resolve cybersecurity and digital trade challenges.
[1] Office of the U.S. Trade Representative, Agreement between the United States of America, the United Mexican States, and Canada, Nov. 30, 2018; see Roy Blunt, USMCA: Where Things Stand, Senate Republican Pol’y Comm. (Mar. 26, 2019), https://www.rpc.senate.gov/policy-papers/usmca-where-things-stand.
[2] See, e.g., Anupam Chander, The Coming North American Digital Trade Zone, Council on Foreign Rel. (Oct. 8, 2018), https://www.cfr.org/blog/coming-north-american-digital-trade-zone (observing that “the TPP is dead, long live the TPP”).
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