HOW HORIZONTAL SHAREHOLDING HARMS OUR ECONOMY—AND WHY ANTITRUST LAW CAN FIX IT
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 doc- trine, 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.