Articles

An Inquiry into the Perception of Materiality as an Element of Scienter Under SEC Rule 10b-5

67(1): 001 - 037 (November 2011)
In any private action or enforcement proceeding based on SEC Rule 10b-5 the plaintiff, including the Securities and Exchange Commission, must prove that the defendant engaged in deception or manipulation with scienter, that is, an intent to deceive, which lower courts have held encompasses reckless conduct. Where the gravamen of the claim is deception, the deception must have been material. A fact, including forward-looking information, is material if there is a substantial likelihood that a reasonable shareholder would consider the fact important in making his investment decision. This Article demonstrates that in an appropriate case an assessment of whether the defendant acted with scienter should consider whether the defendant appreciated the materiality of an omitted or misrepresented fact. For example, an insider who traded in the securities of his employer while he was aware of nonpublic information should not be found to have acted with scienter, if, before trading, he made a good faith evaluation of that information, including (but not necessarily) consulting with counsel, and concluded that the information was not material, even though a trier of fact later found that the information was material when the trade occurred.,x-default

Protecting the Integrity of the Entity Specific Contract: The "No Recourse Against Others Clause"--Missing or Ineffective Boilerplate?

67(1): 039 - 074 (November 2011)
When business lawyers form corporations and other limited-liability entities to be the specified contracting party to a written agreement, they generally assume that the contracting entity?s parent and affiliates will be insulated from the obligations and risks incurred in connection with that entity-specific contract. Too often, this assumption, which is based solely upon the protection provided through the modern limited-liability regimes created by various state statutes, is challenged by equitable and tort-based theories asserted by a disappointed counterparty seeking recourse from persons with whom it did not contract. These challenges are successful more often than is sometimes thought. The authors believe that the owners, directors, and officers of limited-liability entities would obtain substantial benefit from supplementing the limited liability granted through statute with a specifically negotiated contractual provision. While the ?no recourse against others? clause commonly found in corporate indentures is a helpful starting point for developing such a provision, this clause may not be as effective against the modern threats to limited liability as some may think because it was originally created to guard against threats that have been largely assigned to the history vaults. Accordingly, consistent with the private equity industry?s modern adaptation of this clause in the context of the documentation of mergers and acquisitions, the authors propose an overhaul of the historical ?no recourse against others? clause and an expansion of the use of this updated and modernized clause to all entity-specific contracts.

Reality Check on Officer Liability

67(1): 075 - 098 (November 2011)
This article addresses the fiduciary duties of corporate officers. Responding to a critique that recent scholarly analyses of officers depart from reality, it argues that, on a variety of grounds, those analyses are more realistic than the critique and provide doctrinal coherence and advance the goal of meaningful executive accountability. The divergent governance functions of directing versus managing are described and it is argued that those disparate roles should matter for fiduciary duty analysis. No great outbreak of litigation should be expected if officers are held to a stricter duty of care than directors because boards of directors, not courts, likely will resolve the vast majority of disputes concerning officer breaches of duty. The ex-ante and ex post roles of fiduciary duties are emphasized, and the need for the Delaware legal community to more fully address officer duties is emphasized, lest the federal government emerge as the chief regulator of senior management, a role central to corporate governance.