On Corporate Law Federalism: Threatening the Thaumatrope Sean J. Griffith and Myron T. Steele, 61(1):1-24 (November 2005) This article notes an overlooked advantage of state as opposed to federal regulation of corporate governance—the ability of state law to alternate between lax and stringent regulation, shifting between hard-edged rules and fuzzy standards and between strong and weak interpretations of fiduciary constraints. The authors refer to this back-and-forth regulatory methodology as "thaumatrope analytics" and argue that it has significant advantages over the federal method of inflexible governance mandates. Increased federalization of corporate law risks losing the value of the subtle state regulatory methodology to the potential disadvantage of business corporations and the economy of which they are a part. The Dilemma That Should Never Have Been: Minority Freeze Outs in Delaware Peter V. Letsou and Steven M. Haas, 61(1):25-94 (November 2005) This article examines the current state of freeze-outs under Delaware law. It argues that Solomon v. Pathe Communications does not preclude application of the entire fairness standard to freeze outs structured as tender offer/short-form mergers. Such transactions, the authors suggest, pose greater risks to minority shareholders than traditional freeze outs and should be scrutinized under the same entire fairness test that, at least since Weinberger v. UOP, Inc., has been applied to traditional freeze outs. The authors state, however, that the risks to minority shareholders of freeze-out transactions have been overstated, and that Lynch Communication has been wrongly construed (in cases such as Cox Communications) as establishing a per se rule of entire fairness. They urge that Weinberger's entire fairness test be interpreted—both in traditional freeze-out transactions and in the newer tender offer/short-form mergers—as originally formulated in Weinberger and Rabkin to apply only when a complaint alleges, with particularity, specific acts of unfair dealing that go beyond mere inadequacy of price. The article further contends that, in applying Weinberger's and Rabkin's pleading requirements, courts should deem minority shareholder complaints insufficient to trigger entire fairness review, when (1) the freeze-out transaction has been approved by a properly functioning special committee of independent directors; (2) the freeze-out transaction has been effectively approved by holders of a majority of the minority shares; and (3) the controlling shareholder has fulfilled its disclosure obligations and abstained from coercive or otherwise illegal conduct. A Transactional Lawyer's Perspective on the Attorney-Client Privilege: A Jeremiad for Upjohn William W. Horton, 61(1): 95-134 (November 2005) In the evolving dialogue concerning "gatekeeper" duties of corporate lawyers, the scope and social utility of the attorney-client privilege in the corporate setting and related concepts of client confidentiality have come under increasing scrutiny. Indeed, in the face of growing pressure on corporations to waive the privilege in connection with government investigations, some have questioned whether there is any legal or social justification for the corporate attorney- client privilege. While these challenges play out most directly in the litigation setting, concepts of privilege and confidentiality may also significantly affect the nature and flow of communications necessary for corporate and transactional lawyers, including in-house lawyers, to provide effective and appropriate counsel to their clients. This article suggests that current initiatives that weaken the practical vitality of the privilege in the corporate setting do not take into account the realities of attorney-client communications in that setting, and that such efforts may undercut the effectiveness of corporate and transactional lawyers in promoting legal compliance by their corporate clients. The article further suggests that the lessons of Upjohn Company v. United States concerning the importance of the corporate attorney-client privilege have become obscured in the wake of recent corporate scandals and that those lessons should inform the current debate. Charitable Contributions and the FCPA: Schering Plough and the Increasing Scope of SEC Enforcement John P. Giraudo, 61(1):135-154 (November 2005) Schering-Plough recently settled an SEC enforcement action that alleged violations of the FCPA's accounting provisions, agreeing, without admitting wrongdoing, to pay a fine of $ 500,000. The complaint alleged that Schering-Plough's subsidiary in Poland made charitable contributions to a Polish historic preservation organization, the President of which was the Director of a government program that financed the acquisition of medical supplies in the Polish region of Silesia. Coincident with the contributions there was a significant increase in sales by Schering-Plough to the Silesian government's health care network. Schering-Plough's country manager, who authorized the payments, was found to have falsified the charitable contributions on the subsidiary's books and to have concealed them from the head office of the parent company. The case is noteworthy for a number of reasons. It is the first instance in which making charitable contributions was alleged to violate the FCPA. Consequently, the case has implications for corporate charitable giving and the social responsibility projects supported by many multinational companies. The case also underscores the SEC's position that enforcement actions under the books and records and internal controls provisions of the FCPA may be brought against parent companies for the actions of their subsidiaries even when the parent has no knowledge of the subsidiary's actions. More importantly, the case suggests that registrants may be liable for FCPA violations if they fail to install internal controls to scrutinize links between government officials and the activities of their overseas subsidiaries, including their charitable giving. Finally, the case highlights the widening scope of the SEC's FCPA enforcement activities, facilitated by the increased resources that were made available to the Commission in the aftermath of recent corporate scandals. Icarus and American Corporate Regulation David A. Skeel, Jr. 61(1): 155-178 (November 2005) Nearly all of America's most important federal corporate regulation has been enacted in the wake of corporate scandals, while state lawmakers have tended to regulate on a more continuous basis. After exploring the historical evolution of America's two-track regulatory structure for corporate law, this article considers the most recent cycle of scandal and reform. The article (1) assesses the likely effectiveness, that is, the merits of the recent Sarbanes-Oxley Act and other recent governance reforms; (2) considers the mode of American regulation, in particular, the reliance on courts and federally imposed mandatory rules, in contrast to the more norms-based approach used in England for important issues such as takeover regulation; and (3) concludes by briefly considering the scope of American corporate law and the role of corporate ethics. Successor Liability and Bankruptcy Sales Revisited—A New Paradigm Michael H. Reed, 61(1):179-216 (November 2005) When applied in bankruptcy cases, the successor liability doctrine collides with the fundamental policy underlying the Bankruptcy Code of equality of distribution to creditors holding claims of the same rank and with the important goal of enabling the bankruptcy estate's representative to sell property of the estate at a fair price for the general benefit of creditors of the enterprise. In a 1996 article in The Business Lawyer, the author analyzed whether and to what extent the Bankruptcy Code authorizes a trustee or debtor to sell property of the estate "free and clear" of successor liability claims. Since 1996 the basic principles of successor liability have remained largely unchanged. However, consistent with the trend to use Chapter 11 for liquidation rather than reorganization, it is increasingly common for debtors to use § 363 of the Code, rather than a Chapter 11 plan of reorganization, as the vehicle for selling major assets. Thus, in revisiting the topic of the 1996 article, the author focuses on sales "free and clear of interests" under § 363(f) of the Code. The central theme of the article is a "new paradigm" proposed by the author under which all monetary claims would be treated as "interests in property" under § 363(f). The new paradigm is proposed as an alternative to the "interest in property" approach employed by the Fourth Circuit in In re Leckie Smokeless Coal Co. and the Third Circuit in In re Trans World Airlines, Inc. In those cases and subsequent decisions that followed them, the courts treated successor liability claims as interests in property under § 363(f) on the theory that such claims are "connected to" or "arise from" the conveyed assets or how the debtor used the assets. The article identifies certain problems presented by this approach and suggests how the proposed new paradigm might solve those problems. The Regulation of Specialists and Implications for the Future George T. Simon and Kathryn M. Trkla, 61(1): 217-388 (November 2005) This article traces the changing roles and functions of exchange specialists and how they have been regulated under federal law. It then analyzes whether restrictions on a specialist's trading for its own account developed in the 1930s are still relevant, with the benefit of this historical context. This is a timely issue. The SEC's new Regulation NMS has forced the NYSE to adopt a hybrid electronic/floor auction market structure in which the specialist will no longer have a central role in managing the exchange auction or executing limit orders on the book. The emphasis will shift to the specialist's dealer role, and the role of specialists and Nasdaq market makers will converge. Specialists, though, unlike Nasdaq market makers, are permitted to trade for their own account only for the purpose of maintaining a fair and orderly market. Congress imposed this negative trading obligation on specialists in 1934 to mitigate the specialist's inherent conflict of interest when acting as both broker and dealer and the trading advantage gained from knowledge of the limit order book. Those concerns may no longer be relevant, and at least warrant reexamination. REPORTS Streamlined Form of Closing Opinion Introduction by Donald W. Glazer and Stanley Keller Opinion by Boston Bar Association, 61(1): 389-398 (November 2005) Changes in the Model Business Corporation Act—Proposed Amendments to Chapters 8 and 10 Relating to Voting by Shareholders for the Election of Directors Committee on Corporate Laws, ABA Section of Business Law, 61(1): 399-430 (November 2005)
