August 17, 2020

European Union

European Union

Continuity of Contracts After the Introduction of the Euro: The United States Response to European Economic and Monetary Union
      James H. Freis, Jr., 53(3): 701–66 (May 1998)
On January 1, 1999, a group of countries within the European Union will proceed with the third and final stage of Economic and Monetary Union—the introduction of the euro as a single currency. This event could affect continuity of contracts that contain a payment obligation denominated in a national currency to be replaced by the euro. This Article details and critiques legislative steps taken within the European Union and the states of California, Illinois, Michigan, New York, and Pennsylvania to ensure continuity of contracts.

Achieving Legal and Business Order in Cyberspace: A Report on Global Jurisdictional Issues Created by the Internet
      committee on Cyberspace Law, 55(4): 1801–1946 (Aug. 2000)
The explosion of electronic commerce has dramatically increased the contact between buyers and sellers habitually resident in different states or countries and has, therefore, also dramatically increased the number of potential disputes in which jurisdictional issues may arise. The law of jurisdiction historically has focused on where certain acts occurred; in cyberspace, such questions are difficult to resolve. Nonetheless, parties themselves exist in real space and may target others in known locations. Although such targeting is ordinarily thought of as the act of a seller, the search power of the Internet empowers buyers as well, allowing them to find a local, passive seller with ease. In light of such changes in classic jurisdictional assumptions, the Report begins by proposing certain solutions to various repeating jurisdictional questions. It then sets out and explains the changes, discusses the doctrinal framework for personal, prescriptive, and enforcement jurisdiction from the points of view of the United States, the European Union, and Japan, and finally considers how changes and doctrine affect nine specific substantive law areas most frequently implicated by electronic commerce.

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.

Massey Prize for Research in Law, Innovation, and Capital Markets Symposium—Foreword
     70(2): 319-320 (Spring 2015)

Financial Innovation and Governance Mechanisms: The Evolution of Decoupling and Transparency
     Henry T. C. Hu; 70(2): 347-406 (Spring 2015)
Financial innovation has fundamental implications for the key substantive and information-based mechanisms of corporate governance. “Decoupling” undermines classic understandings of the allocation of voting rights among shareholders (via, e.g., “empty voting”), the control rights of debtholders (via, e.g., “empty crediting” and “hidden interests”/ “hidden non-interests”), and of takeover practices (via, e.g., “morphable ownership” to avoid section 13(d) disclosure and to avoid triggering certain poison pills). Stock-based compensation, the monitoring of managerial performance, the market for corporate control, and other governance mechanisms dependent on a robust informational predicate and market efficiency are undermined by the transparency challenges posed by financial innovation. The basic approach to information that the SEC has always used—the “descriptive mode,” which relies on “intermediary depictions” of objective reality—is manifestly insufficient to capture highly complex objective realities, such as the realities of major banks heavily involved with derivatives. Ironically, the primary governmental response to such transparency challenges—a new system for public disclosure that became effective in 2013, the first since the establishment of the SEC—also creates difficulties. This new parallel public disclosure system, developed by bank regulators and applicable to major financial institutions, is not directed primarily at the familiar transparency ends of investor protection and market efficiency.

As starting points, this Article offers brief overviews of: (1) the analytical framework developed in 2006−2008 for “decoupling” and its calls for reform; and (2) the analytical framework developed in 2012−2014 reconceptualizing “information” in terms of three “modes” and addressing the two parallel disclosure universes.

As to decoupling, the Article proceeds to analyze some key post- 2008 developments (including the status of efforts at reform) and the road ahead. A detailed analysis is offered as to the landmark December 2012 TELUS opinion in the Supreme Court of British Columbia, involving perhaps the most complicated public example of decoupling to date. The Article discusses recent actions on the part of the Delaware judiciary and legislature, the European Union, and bankruptcy courts—and the pressing need for more action by the SEC. At the time the debt decoupling research was introduced, available evidence as to the phenomenon’s significance was limited. This Article helps address that gap.

As to information, the Article begins by outlining the calls for reform associated with the 2012−2014 analytical framework. With revolutionary advances in computer- and web-related technologies, regulators need no longer rely almost exclusively on the descriptive mode rooted in intermediary depictions. Regulators must also begin to systematically deploy the “transfer mode” rooted in “pure information” and the “hybrid mode” rooted in “moderately pure information.” The Article then shows some of the key ways that the new analytical framework can contribute to the SEC’s comprehensive and long-needed new initiative to address “disclosure effectiveness,” including in “depiction-difficult” contexts completely unrelated to financial innovation (e.g., pension disclosures and high technology companies). The Article concludes with a concise version of the analytical framework’s thesis that the new morphology of public information—consisting of two parallel regulatory universes with divergent ends and means—is unsustainable in the long run and involve certain matters that need statutory resolution. However, certain steps involving coordination among the SEC, the Federal Reserve, and others can be taken in the interim.

Human Rights Protections in International Supply Chains - Protecting Workers and Managing Company Risk
      David V. Snyder and Susan A. Maslow, 73(4) 1093-1106 (Fall 2018)

Soft Dollars, Hard Choices: Reconciling U.S. and EU Policies on Sell-Side Research
     Paul G. Mahoney, 75(3): 2173-2200 (Summer 2020)
Investors use research provided by broker-dealers, also known as sell-side research, to help formulate trading ideas and strategies. Investors normally pay for sell-side research through brokerage commissions. Recent European Union regulations require some institutional investment managers to unbundle, or pay separately for, research and trade execution. Unbundling might subject a U.S. broker-dealer to regulation under the Investment Advisers Act of 1940, significantly affecting the broker’s business practices.