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
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.
ESTIMATING THE NEED FOR ADDITIONAL BANKRUPTCY JUDGES IN LIGHT OF THE COVID-19 PANDEMIC
Benjamin Iverson, Jared A. Ellias, and Mark Roe†
In this Article, we present the first effort to use an empirical approach to bolster the capacity of the bankruptcy system during a national crisis—here, the COVID-19 crisis. We provide two analyses, one using data from May 2020, very early on in the crisis, and another using data from September 2020, closer to the publication of this Article. Our analysis is based on an empirical observation: Historically, an increase in the unemployment rate has been a leading indicator of a rise in bankruptcy filings. If this historical trend continues to hold, the May 2020 unemployment rate of 13.3% would have predicted a substantial increase in bankruptcy filings and the lower September 2020 level would still predict noticeably increased filings. Clearly, governmental assistance, the unique features of the COVID-19 pandemic, the possibility of a quick economic recovery, and judicial triage are likely to reduce the volume of bankruptcies and increase the courts’ capacity to handle those that occur. It is also plausible that the recent unemployment spike will be short-lived—indeed, by September 2020, the rate had declined to 7.9%. Further, medical solutions to the underlying pandemic—such as the recent initial distribution of an effective vaccine—would further reduce the pressure on the bankruptcy system. Yet, even assuming that the worst-case scenarios are averted, our analysis suggests that a substantial investment in the bankruptcy system resources should be considered, even if only on a standby basis.
Our model assumes that Congress would like to have enough bankruptcy judges so that the average judge would not work more than the last bankruptcy peak in 2010, when the bankruptcy system was pressured and judges worked 50 hour weeks on cases on average. Because the bankruptcy system before the pandemic was not stretched as severely as it was prior to the 2010 financial crisis, it has some extra capacity to handle extra cases.
To keep judicial workload at 2010 levels, the bankruptcy system would need at least 50 additional temporary judges based on the number of unemployed in May 2020 who did not see themselves as temporarily unemployed. In the worst-case scenario, in which none of the May 2020 unemployed returned to work quickly, the bankruptcy system would have needed as many as 243 temporary judges—which would have represented a considerable expansion, even if only temporary, of the bankruptcy judiciary. The lower September 2020 unemployment rate points to a need for 20 temporary judges. Because of this model’s sensitivity to unemployment data, it reports a wide range of estimations for additional bankruptcy judgeships.
We discovered a considerable administrative lag of about a year or more for appointing additional bankruptcy judges. Therefore, given that economic crises can unfurl much faster, embedding extra capacity in the bankruptcy judicial system in normal economic times is a prudent precaution to prepare for unexpected stress of additional bankruptcy petitions.
† BYU Marriott School of Business; University of California, Hastings College of the Law; and Harvard Law School. The authors thank Jacob Barrera, Denise Han, Jessica Ljustina, Spencer Kau, Victor Mungary, Julia Staudinger, and Sara Zokaei for research assistance. We earlier, at the very beginning of the COVID-19 crisis, wrote a report on the potential pressure on bankruptcy judicial capacity due to the Covid-19 crisis, on which this document is based. That report was endorsed by a group of bankruptcy academics and then forwarded to Congress. For recent Congressional action related to our report, see infra note 8.
The recent unanimous decision of the United States Supreme Court (“Supreme Court” or “Court”) in GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC (“Outokumpu”) resolves a relatively straightforward question: whether a non-signatory to an international commercial arbitration agreement can enforce it on the basis of the equitable estoppel doctrine. The United States Courts of Appeals for the Eleventh and Ninth Circuits had categorically ruled out the availability of equitable estoppel in this context. In contrast, the First and Fourth Circuits had applied the doctrine to enforce international commercial arbitration agreements by or against non-signatories. Answering the question in the affirmative and reversing the Eleventh Circuit, the Supreme Court has now resolved this split among the circuit courts. Its decision also brings much-needed clarity and predictability to the enforcement of international commercial arbitration agreements in the United States. However, in its narrow judgment the Supreme Court left unresolved two related and equally contentious questions: first, whether international commercial arbitration agreements must be signed to be valid and enforceable in the United States, and second, how the equitable estoppel doctrine is to be formulated in this context and whether state or federal law governs its application.
A brief introduction to international commercial arbitration in the United States will set the stage for further discussion of Outokumpu and these lingering questions. Congress enacted the Federal Arbitration Act (“FAA” or “Act”) to govern the enforcement of arbitration agreements falling within its jurisdiction. Chapter 1 of the Act governs domestic arbitration agreements, while Chapter 2 incorporates the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention” or “Convention”), which governs the enforcement of international commercial arbitration agreements and awards. Chapter 1 of the FAA also applies to actions and proceedings brought under Chapter 2 to the extent that Chapter 1 is not “in conflict” with Chapter 2 or the New York Convention.
The Supreme Court has consistently interpreted the FAA as embodying a “liberal federal policy favoring arbitration agreements,” and as creating “a body of federal substantive law” that requires arbitration agreements to be placed “upon the same footing as other contracts.” Moreover, “[t]he goal of the [New York] Convention, and the principal purpose underlying American adoption and implementation of it, was to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standards by which agreements to arbitrate are observed and . . . enforced in the signatory countries.” In line with this pro-arbitration approach, the Supreme Court in Outokumpu held that non-signatories can rely on the equitable estoppel doctrine to enforce international commercial arbitration agreements under the Convention. However, two related questions that have long been the subject of contradictory circuit court decisions remain unresolved in the Court’s opinion.
The first question is antecedent to the equitable estoppel issue and relates to the “in writing” requirement of Article II(1) of the New York Convention. Article II(1) provides that the “[c]ontracting State shall recognize an [arbitration] agreement in writing.” The term “in writing” is in turn defined in Article II(2) as including “an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.” Circuit courts have not consistently interpreted the Convention’s “in writing” requirement. The Second, Third, Ninth, and Eleventh Circuits have found that the Convention requires an actual signature for an international commercial arbitration agreement to be valid. The First, Fourth, and Fifth Circuits, in contrast, have not insisted on a strict signature requirement and have enforced international commercial arbitration agreements on the basis of various contract and agency principles. The Supreme Court’s decision in Outokumpu may be interpreted as effectively siding with the latter circuit courts on this question. After all, how can courts continue to impose a strict signature requirement when the Supreme Court has allowed non-signatories to rely on equitable estoppel under the Convention? Nonetheless, the Court explicitly declined to decide “whether Article II(2) requires a signed agreement.”
The second question, which the Supreme Court left to the Eleventh Circuit to determine on remand, arises from the Court’s holding that non-signatories can enforce international commercial arbitration agreements on the basis of equitable estoppel. This question relates to the specific formulation of the equitable estoppel doctrine in this context and to “which body of law” governs its application––federal or state law. In her concurring opinion, Justice Sotomayor noted the varied formulations of the doctrine across jurisdictions, but she would leave lower courts to determine the matter “on a case-by-case basis.” The general understanding has been that courts are to apply “ordinary state law principles that govern the formation of contracts” to the enforcement of domestic arbitration agreements under Chapter 1 of the FAA. However, circuit courts have divided as to whether federal common law or state law governs the application of equitable estoppel in the international context. The First, Second, and Fourth Circuits have applied federal law to address this question, while the Fifth and Eight Circuits have held that state law governs the enforcement of international arbitration agreements on the basis of doctrines such as equitable estoppel. The Supreme Court’s opinion in Outokumpu is ambiguous on this question
This Note will next summarize the facts of the Outokumpu case and the lower courts’ judgments. It will then turn to the opinion of the Supreme Court and discuss both the questions the Court decided and the questions that it left unanswered or ambiguous.
† Assistant Professor, University of Alberta Faculty of Law