The Forward Contract Exclusion: An Analysis of Off-Exchange Commodity-Based Instruments
committee on Commodities Regulation of the Association of the Bar of the City of New York, 41(3): 853–906 (May 1986)
This Report discusses the legislative history, the regulatory record, and the case law under both the Commodity Exchange Act and the federal securities laws. It recommends the adoption of a safe harbor for commercial and institutional transactions so that the evolution and expansion of these markets are not hindered by legal technicalities relevant to retail or on-exchange transactions.
Using Finance Theory to Measure Damages in Cases Involving Fraudulent Trade Allocation Schemes
Jeffry L. Davis, William C. Dale, and James A. Overdahl, 49(2): 591–615 (Feb. 1994)
Federal laws governing both the securities markets and the commodities markets prohibit brokers, advisors, and other market professionals, except in specific instances, from allocating orders among accounts after trades have been executed. This prohibition is aimed at preventing these persons from engaging in fraudulent trade allocation schemes, the object of which is to divert profitable trades to favored accounts, including the broker's own, and to allocate losing trades to less-favored accounts. In this Article, the authors use finance theory to develop a systematic and quantifiable measure of damages in cases of fraudulent trade allocation. This Article treats the trader's discretion to allocate orders after trade execution as an option that can be valued, like any other option, using the theory of rational option pricing. The authors apply their measure to two actual trade allocation cases. It is their contention that this method is generally applicable to all trade allocation cases.
Empty Voting and Hidden (Morphable) Ownership: Taxonomy, Implications, and Reforms
Henry T. C. Hu and Bernard Black, 61(3):1011–1070 (May 2006)
Most American publicly held corporations have a one-share, one-vote structure, in which voting power is proportional to economic ownership. This structure gives shareholders economic incentives to exercise their voting power well and helps to legitimate managers' exercise of authority over property the managers do not own. Berle-Means' "separation of ownership and control" suggests that shareholders face large collective action problems in overseeing managers. Even so, mechanisms rooted in the shareholder vote, including proxy fights and takeover bids, constrain managers from straying too far from the goal of shareholder wealth maximization.
In the past few years, the derivatives revolution, hedge fund growth, and other capital market developments have come to threaten this familiar pattern throughout the world. Both outside investors and corporate insiders can now readily decouple economic ownership of shares from voting rights to those shares. This decoupling—which we call "the new vote buying"—is often hidden from public view and is largely untouched by current law and regulation. Hedge funds, sophisticated and largely unfettered by legal rules or conflicts of interest, have been especially aggressive in decoupling. Sometimes they hold more votes than economic ownership, a pattern we call "empty voting." That is, they may have substantial voting power while having limited, zero, or even negative economic ownership. In the extreme situation of negative economic ownership, the empty voter has an incentive to vote in ways that reduce the company's share price. Sometimes hedge funds hold more economic ownership than votes, though often with "morphable" voting rights—the de facto ability to acquire the votes if needed. We call this "hidden (morphable) ownership" because under current disclosure rules, the economic ownership and (de facto) voting ownership are often not disclosed. Corporate insiders, too, can use new vote buying techniques.
This article analyzes the new vote buying and its corporate governance implications. We propose a taxonomy of the new vote buying that unpacks its functional elements. We discuss the implications of decoupling for control contests and other forms of shareholder oversight, and the circumstances in which decoupling could be beneficial or harmful to corporate governance. We also propose a near-term disclosure-based response and sketch longer-term regulatory possibilities. Our disclosure proposal would simplify and partially integrate five existing, inconsistent share-ownership disclosure regimes, and is worth considering independent of its value with respect to decoupling. In the longer term, other responses may be needed; we briefly discuss possible strategies focused on voting rights, voting architecture, and supply and demand forces in the markets on which the new vote buying relies.
In Defense of the Bankruptcy Code's Safe Harbors
Mark D. Sherrill, 70(4): 1007-1038 (Fall 2015)
Since its enactment in 1978, the U.S. Bankruptcy Code has seen gradual but dramatic enlargement of rights for non-debtor counterparties to derivatives contracts. That enlargement of rights has generally tracked the rapid expansion of the use of derivatives in the United States. In light of the recent financial crisis, many have criticized the scope of the Bankruptcy Code's safe-harbor provisions and called for them to be narrowed or eliminated. This article rejects several proposals to narrow the safe harbors and argues that the provisions reflect Congress's effort to balance competing national policies. In contrast to many recent pieces, this article contends that the Bankruptcy Code's safe harbors provide a net benefit to the United States and its financial stability.