Settlement of Claims and Litigation: Legal Rules, Negotiation Strategies, and In-House Guidelines
R. Clifford Potter, 41(2): 515—31 (Feb. 1986)
Despite increasing reliance on the settlement of disputes, many settlement rules of law remain in a state of flux in the state and federal courts. This Article explores the most important rules and recommends various settlement strategies and corporate guidelines and procedures designed to ensure that counsel obtain effective and lasting settlements.
Conflicts of Interest in Corporate Litigation
Samuel R. Miller, Richard E. Rochman, and Ray Cannon, 48(1): 141—213 (Nov. 1992)
Situations involving conflicts of interest commonly arise in corporate litigation. This Article analyzes these situations and provides practical advice for dealing with conflicts issues confronting corporate litigators.
Business Courts: Towards a More Efficient Judiciary
Ad Hoc Committee on Business Courts, 52(3): 947—63 (May 1997)
Specialization is an increasingly common characteristic of Western societies in the late twentieth century, and that trend is likely to continue into the twenty-first century. The professions, including the legal profession, are more subject to the pressures that result in specialization than those societal activities that are less complex and involve less technical knowledge and experience. Although the legal profession itself has become more and more specialized in recent decades, the judiciary in most jurisdictions has lagged behind in this trend. In an era of scarce judicial resources, the inefficiencies that result from a failure to specialize have become less and less tolerable. This Report describes the concept of specialization in the judiciary and sets forth instances where specialization has been implemented. It also examines reasons why specialization with respect to complex business, corporate, and commercial matters is desirable and sets forth, in summary form, the result of a survey of all fifty states and the District of Columbia conducted by the Committee in the spring of 1996.
The Merger Wave: Trends in Merger Enforcement and Litigation
Richard G. Parker and David A. Balto, 55(1): 351—404 (Nov. 1999)
The merger wave is one of the most significant developments in the U.S. economy. Practically every day there is an announcement of some substantial merger that may transform an entire industry. In this Article, two government antitrust enforcers explain why the merger wave is occurring and how regulatory agencies are responding to the increase in merger activity with a sensible and careful program of enforcement. In particular, this Article describes several trends in merger litigation and enforcement that respond to the merger wave.
The Emerging Judicial Hostility to the Typical Damages Model Employed by Plaintiffs in Securities Class Action Lawsuits
Robert A. Alessi, 56(2): 483 (Feb 2001)
In securities class action lawsuits, it is not uncommon for plaintiffs' counsel to proffer expert testimony in support of their claims that the respective shareholder classes have been damaged in amounts totaling hundreds of millions of dollars. Recently, however, the damages model typically employed by the plaintiffs' bar in securities class actions has been subjected to renewed judicial scrutiny. This Article suggests that several recent court decisions reflect the judiciary's growing intolerance for the untested, speculative nature of the plaintiffs' damages model. In light of this increasing judicial skepticism, defendants may well elect to press their challenges to the model's more sweeping assumptions, suspect methodologies, and dubious conclusions.
Game Theory and Gonsalves: A Recommendation for Reforming Stockholder Appraisal Actions
Christian J. Henrich, 56(2): 697 (Feb 2001)
Statutory appraisal remedies have received much criticism from the courts, legal commentators, and parties to such actions. One of the principal weaknesses of present appraisal procedures is that they incentivize the litigants to present highly contradictory arguments and evidence to the court. This makes an already difficult task, appraising shares of stock, even more challenging. The Article recommends instituting a Final-Offer Arbitration (FOA) procedure as a means of motivating the parties in an appraisal action to present more reasonable arguments and analyses to the court. In FOA, the litigants submit a final, binding offer as to the shares' value. The Court must choose one party's offer, without modification. The Article uses game theory to demonstrate (i) how FOA works, (ii) why FOA is likely to improve the efficiency and accuracy of the statutory appraisal process, and (iii) the likely impact of implementing such a procedure on key constituencies.
Civil Liability for Aiding and Abetting
Richard C. Mason, 61(3):1135—1182 (May 2006)
Civil liability for aiding and abetting provides a cause of action that has been asserted with increasing frequency in cases of commercial fraud, state securities actions, hostile takeovers, and, most recently, in cases of businesses alleged to be supportive of terrorist activities. The U.S. Supreme Court, in its 1994 decision in Central Bank of Denver, N.A. v. First Interstate Bank of Denver , ended decades of aiding and abetting liability in connection with federal securities actions. However, the doctrine since has flourished in suits arising from prominent commercial fraud cases, such as those concerning Enron Corporation and Parmalat, and even in federal securities cases some courts continue to impose relatively broad liability upon secondary actors. This article reviews Central Bank and its limitations, before turning to an analysis of the elements of civil liability for aiding and abetting fraud. The article then similarly identifies and analyzes the elements of liability for aiding and abetting breach of fiduciary duty, which predominantly concerns professionals, such as accountants and attorneys, that are alleged to have assisted wrongdoing by their principal. The analysis then examines aiding and abetting liability in the context of particular, frequently–occurring, factual matrices, including banking transactions, directors and officers, state securities actions, and terrorism. The article concludes by summarizing emerging principles evident from judicial decisions applying this very flexible and potent source of civil liability.
Independent Directors as Securities Monitors
Hillary A. Sale, 61(4):1375-1412 (August 2006)
This paper considers the role of independent directors of public companies as securities monitors. Rather than engaging in the debate about whether independent directors are good or bad, important or unimportant, the paper takes their existence and basic governance role as a given, focusing instead on what recent statements from Securities and Exchange Commission officials indicating an increased focus on independent directors and their role in preventing securities fraud. The paper notes that the SEC believes that independent directors are on the board to act, at least in part, as securities monitors. This securities monitor role is another aspect of the information-forcing-substance disclosure model that the SEC has used to achieve improved corporate governance. Although directors face heightened risk when they draft or sign disclosure documents, they also have an ongoing responsibility to be informed of developments within the company, ensure good processes for accurate disclosures, and make reasonable efforts to assure that disclosures are adequate. Independent directors with expertise should be involved in reviewing and, sometimes, drafting statements. All directors, however, should be fully aware of the company's press releases, public statements, and communications with security holders and sufficiently engaged and active to question and correct inadequate disclosures. In addition to defining the role of independent directors as securities monitors, the article reviews the liability independent directors might face under private causes of action and contrasts it with the SEC's enforcement powers and remedies. The article describes some of the SEC's prior statements that emphasize the role of independent directors as securities monitors and the importance of their providing both guidance and check and balance.
The Uncertain Efficacy of Executive Sessions Under the NYSE's Revised Listing Standards
Robert V. Hale II, 61(4):1413-1426 (August 2006)
This article briefly explores key issues relating to the use of non-management executive sessions under Section 303A.03 of the NYSE's revised listing standards, including the authority of the SEC to enforce such a requirement, the status of board actions taken at such meetings, and whether such sessions may result in altering the principal roles of the board and management. In this respect, the Disney derivative litigation affords an opportunity to consider the use of executive sessions in relation to these issues, as well as the business judgment rule. Moreover, Disney raises the question whether mandatory non-management executive sessions might have created a different outcome under the circumstances in the case. The article concludes with a discussion of some practical considerations for attorneys and corporate secretaries in complying with the requirement.
Internal Investigations and the Defense of Corporations in the Sarbanes-Oxley Era
Robert S. Bennett, Alan Kriegel, Carl S. Rauh, and Charles F. Walker, 62(1): 55–88 (Nov. 2006)
Internal investigations long have been an integral part of the successful defense of corporations against charges of misconduct, as well as an important board and management tool for assessing questionable practices. With the heightened standards of conduct and increased exposure created by Sarbanes-Oxley, this essential instrument for safeguarding corporate interests has become even more crucial in identifying and managing risk in the enforcement arena. This article examines from a practitioner's standpoint when and how internal investigations should be conducted in order to protect the corporation in criminal, civil and administrative proceedings. Particular attention is paid to the issues created by a concurrent government investigation and in dealing with employees and former employees in the course of an investigation. The article also addresses the role of the Audit Committee under Sarbanes-Oxley, and the important issue of reporting the findings of the investigation to appropriate corporate officials. The subject of self-reporting by the Company to enforcement authorities is considered as well. In this context, the article explores the SEC's position on crediting self-reporting and cooperation as set forth in the Seaboard report; Department of Justice policy as embodied in the Thompson Memorandum; and the impact of the Federal Sentencing Guidelines for Organizations.
Proving Solvency: Defending Preference and Fraudulent Transfer Litigation
Robert J. Stearn, Jr., 62(2): 359–396 (February 2007)
Litigating solvency can be a complicated endeavor. This article provides a general road map for proving solvency in the defense of preference and fraudulent transfer litigation. The three common measures of solvency are discussed: The "balance sheet" test; the "unreasonably small capital" test; and the "ability to pay debts" test. The article also provides practical suggestions for defense counsel.
Meeting Daubert Standards in Calculating Damages for Shareholder Class Action Litigation
Linda Allen, 62(3): 955–970 (May 2007)
Current practice in class action litigation entails a series of arbitrary assumptions about fundamental parameters that may not meet Daubert standards of scientific evidence. This Article surveys the commonly used models used to estimate stock price inflation and the number of damaged shares for the purposes of damage calculations in shareholder class action litigation. This Article proposes tractable methods for improving current practice using: (1) a regression approach to event studies and (2) a new model (denoted the Theoretically-grounded Microstructure Trading Model or TMTM) that incorporates the well-established literature of market microstructure and trade direction into a model that can be estimated utilizing publicly available data. Actual trading data are used to validate the assumptions of the TMTM approach and to refute the assumptions of extant trading models such as the Proportional Trading Model (PTM) and the Two Trader Model (TTM).
Tontine or Takeback: Reversion Provisions in Class Action Settlement Agreements
Ralph C. Ferrara and Riva Khoshaba Parker, 62(3): 971–982 (May 2007)
Class action litigation rages on in securities, antitrust, mass torts and products liability sectors; these actions are more often settled than litigated to verdict. As the classes and claims grow larger, the damages claimed greater, and the potential for entanglements with regulatory and criminal investigations increases, settlement agreements grow increasingly complex as litigants attempt fairly to put to rest claims and allegations from multiple sectors. Inevitably, at the end of the day in most settlements, there is still some money left over in the settlement fund after all the claiming class members have been paid. The dilemma arises as to what to do with this residual amount: one possible, underutilized option is to permit the reversion of any residual funds to the defendants.
Beyond the Basics: Seventy-five Defenses Securities Litigators Need to Know
Jonathan Eisenberg, 62(4): 1281–1394 (August 2007)
After questioning the value of securities class actions, which are largely unknown outside the United States, the author discusses 75 defenses that courts have used to dismiss securities claims. These defenses are typically raised at the motion to dismiss stage, and are important because securities class actions that survive motions to dismiss are usually settled rather than resolved on the merits. The article provides a template for analyzing the application of each defense to securities class action complaints, and then discusses each defense and references key authorities that practitioners can turn to for further analysis.
An Uninvited Guest: Class Arbitration and the Federal Arbitration Act's Legislative History
David S. Clancy and Matthew M.K. Stein, 63(1): 55–80 (November 2007)
In recent years, there has been an explosion of "class arbitrations"—arbitration proceedings in which the claimant purports to represent a class of absent individuals. In this Article, the authors examine the legislative history of the Federal Arbitration Act ("FAA"), and argue that, in enacting the FAA, Congress intended to open the door to non–judicial dispute resolution proceedings with particular fundamental characteristics, and that class arbitration proceedings do not have those characteristics. The authors argue that class arbitration is therefore a novel type of non–judicial dispute resolution neither reviewed nor approved by Congress, and that, as a result, this "uninvited guest" should be subjected to close legal and public–policy scrutiny. The authors also identify multiple areas of particular concern, including, for example, that courts have been reviewing class arbitration decisions under the traditional standard of review highly deferential to arbitrators, suggesting that we are on a path toward the quiet establishment of a forum that adjudicates disputes involving hundreds, thousands, or even tens of thousands of individuals in decisions that are effectively unreviewable.
Consumer Arbitration: If the FAA "Ain't Broke," Don't Fix It
Alan S. Kaplinsky and Mark J. Levin, 63(3): 907–920 (May 2008)
During 2007, Congress showed significant interest in mandatory pre–dispute consumer arbitration agreements. Some in Congress focused on whether to prohibit them altogether. This Article argues that such legislation is unnecessary because the current system of consumer arbitration works well and needs no fix. The authors review case law and empirical studies showing that the current system of checks and balances in the area of consumer arbitration law is sufficiently protective of consumers' rights. These protections emanate from: (1) the Federal Arbitration Act ("FAA") itself, (2) the careful drafting of arbitration agreements, (3) the use of third–party arbitration administrators, and (4) the rigorous enforcement of the FAA by state and federal courts.
The Unreasonable Burden of Proving the Reasonable Care Defense Under the Uniform Securities Act
Mark B. Barnes and Matthew R. St. Louis, 63(4): 1223#151;1242 (August 2008)
Under the Uniform Securities Act (a version of which has been enacted by most states), an entity that sells securities in violation of the Act is potentially liable to investors under the Act's civil remedy provisions. Directors, officers, partners, controlling persons, and others associated with the entity at the time of the sale are also potentially liable, jointly and severally with each other and the entity, solely on account of their affiliation with the entity. While the Act entitles these "derivative liability" defendants to assert an affirmative defense of reasonable care, the affirmative defense is narrowly drafted, and courts have interpreted the defense strictly. This Article examines the decisions in which courts have interpreted the "reasonable care" defense, in particular the November 2007 opinion of the Indiana Supreme Court in Lean v. Reed, and ends by recommending securities law compliance policies and procedures that entities selling securities in Uniform Securities Act states might consider adopting to assist their associated and affiliated persons in managing the risk of potential personal liability.
Applying Stoneridge to Restrict Secondary Actor Liability Under Rule 10b-5
Todd G. Cosenza, 64(1): 59-78 (November 2008)
Although the U.S. Supreme Court's decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., was widely viewed as a sweeping rebuke of the application of "scheme" liability to secondary actors, the Court's decision also raised some questions regarding the precise scope of secondary actor liability under section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. There is an obvious tension between the Court's holding that the secondary actors in Stoneridge could not be held liable because their "deceptive acts, which were not disclosed to the investing public, [were] too remote to satisfy the element of reliance" and its pronouncement that "[c]onduct itself can be deceptive" and could therefore satisfy a Rule 10b-5 claim. In particular, the question of what type of conduct satisfies the element of reliance in a claim against a secondary actor who assists in the drafting of a company's public disclosures remains open to interpretation.
This Article first discusses the general standards of section 10(b) liability and the Supreme Court's decision in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A. The next part of the Article compares the judicial standards of secondary actor liability under Rule 10b-5(b)—the bright line, substantial participation, and creator standards—that emerged in the post- Central Bank era. It then discusses Stoneridge and the Court's recent rejection of secondary actor "scheme" liability under Rule 10b-5(a) and (c). Finally, it reviews recent applications of Stoneridge and analyzes the implications of these decisions going forward.
Working Paper: Best Practices for Debtors' Attorneys
Task Force on Attorney Discipline Best Practices Working Group, Ad Hoc Committee on Bankruptcy Court Structure and the Insolvency Processes, ABA Section of Business Law, 64(1): 79-152 (November 2008)
General Counsel Buffeted by Compliance Demands and Client Pressures May Face Personal Peril
E. Norman Veasey and Christine T. Di Guglielmo,68(1): 57 - 80 (November 2012)
In the "New Reality" of the world of corporate general counsel, the challenges and tensions thrust upon one holding that office have intensified exponentially. Not only does the general counsel uniquely straddle the world of business and law in giving advice to the management and directors of her client (the corporation) but also she may find herself personally in the crosshairs of regulators, prosecutors, and litigants. So, as the rhetoric and real pressures increase to target the general counsel, she must have and use the skills, balance, independence, and courage to be simultaneously the persuasive counselor for her corporate client while being attuned to the need for self-preservation. The lessons from the past targeting of general counsel and other in-house lawyers are ominous. But the quintessential general counsel, acting as both persuasive counselor and a leader in setting the corporation's ethical tone, will do the right thing and thus be prepared to deal with these challenges and tensions.
The Brouhaha Over Intra-Corporate Forum Selection Provisions: A Legal, Economic, and Political Analysis
Joseph A. Grundfest and Kristen Savelle; 68(2): 325-410 (February 2013)
Three hundred publicly traded entities have adopted intra-corporate forum selection (“ICFS”) provisions either in their charters or as bylaw amendments, often without prior stockholder approval. These provisions have been adopted in response to a sharp increase in intra-corporate litigation outside the state of incorporation. The academic literature suggests that this increase is animated by economic incentives of the plaintiffs’ bar that can be inimical to stockholder interests. ICFS provisions are an effective private ordering mechanism for addressing this trend in a manner that responsibly protects stockholder rights.
From Regulation to Prosecution to Cooperation: Trends in Corporate White Collar Crime Enforcement and the Evolving Role of the White Collar Criminal Defense Attorney
Robert S. Bennett, Hilary Holt LoCicero, and Brooks M. Hanner; 68(2): 411-438 (February 2013)
This article traces the steady growth of criminal law into fields that had previously been addressed by civil statutes, particularly in relation to the concept of corporate criminal liability. The article also describes the means through which the federal government has encouraged cooperation between corporations that are being investigated and their investigators. This fundamental shift in how corporate misconduct is treated by the federal government has reframed the role of a criminal defense attorney who defends corporations and executives. Any lawyer facing such a task must be willing to incorporate new strategies into daily practice while also evaluating the theoretical considerations governing what it means to “bet the company.”
SEC Enforcement Actions and Issuer Litigation in the Context of a "Short Attack"
Charles F. Walker and Colin D. Forbes; 68(3): 687-738 (July 2013)
Issuers faced with a short attack—short selling of the issuer’s stock combined with the spread of negative rumors—may contemplate defensive strategies such as litigation and contacting government regulators, in addition to the investor and public relations efforts that are typically utilized in the wake of negative media coverage. Precedent calls for caution in these circumstances, as the record shows that the results of such strategies are mixed, with the SEC often turning its investigative focus to the issuer, and with costly litigation frequently resulting in compromise. This article begins with a discussion of the recent history of regulatory and legislative efforts to address concerns around short attacks and “naked” short selling. It then turns to a discussion of the SEC enforcement cases and private litigation relating to short attacks, and concludes that the SEC has appropriately brought enforcement cases only in clear-cut instances of fraud, while policing the margins through enforcement of the technical requirements of Regulation SHO. The article shows that the SEC enforcement record in this area, and the proof issues generally attendant to these cases, present important considerations for issuers who perceive themselves under siege in a short attack.
Trademark Licensing in the Shadow of Bankruptcy
James M. Wilton and Andrew G. Devore, 68(3): 739-780 (July 2013)
When a business licenses a trademark, transactional lawyers regularly advise that if the trademark licensor files for bankruptcy, the licensee could be left without a right to use the mark and with only a bankruptcy claim for money damages against the licensor. Indeed, the ability of a trademark licensor to reject a trademark license and to limit a licensee’s remedies to a dischargeable claim for money damages has been a significant risk for licensees for twenty-five years based on the Fourth Circuit case, Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc. This result is grounded in the Bankruptcy Code prohibition on remedies of specific performance for non-debtor parties to rejected contracts and is in accord with Bankruptcy Code policy of affording debtors an opportunity to reorganize free of burdensome contracts. In the summer of 2012, however, the Seventh Circuit, in its decision Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, held that a non-debtor trademark licensee retains rights to use licensed trademarks following rejection of the contract by the debtor-licensor. The decision, derived from a pre-Bankruptcy Code paradigm for understanding the rights of non-debtors under rejected executory contracts that convey interests in property, creates a circuit split over the implications of trademark license rejection. This article asserts that the Sunbeam Products case misconstrues the rights of a trademark licensee as a vested property right and is therefore incorrect under both the holding of the Lubrizol case and the pre-Bankruptcy Code paradigm on which the Sunbeam Products case relies.
Best Practices Report on Electronic Discovery (ESI) Issues in Bankruptcy Cases
ABA Electronic Discovery (ESI) in Bankruptcy Working Group, Bankruptcy Court Structure and Insolvency Process Committee, ABA Business Law Section, 68(4): 1113-1148 (August 2013)
Putting Stockholders First, Not the First-Filed Complaint
Leo E. Strine, Jr., Lawrence A. Hamermesh, and Matthew C. Jennejohn, 69(1): 1-78 (November 2013)
The prevalence of settlements in class and derivative litigation challenging mergers and acquisitions in which the only payment is to plaintiffs’ attorneys suggests potential systemic dysfunction arising from the increased frequency of parallel litigation in multiple state courts. After examining possible explanations for that dysfunction and the historical development of doctrines limiting parallel state court litigation—the doctrine of forum non conveniens and the “first-filed” doctrine—this article suggests that those doctrines should be revised to better address shareholder class and derivative litigation. Revisions to the doctrine of forum non conveniens should continue the historical trend, deemphasizing fortuitous and increasingly irrelevant geographic considerations, and should place greater emphasis on voluntary choice of law and the development of precedential guidance by the courts of the state responsible for supplying the chosen law. The “first-filed” rule should be replaced in shareholder representative litigation by meaningful consideration of affected parties’ interests and judicial efficiency.
Standing at the Singularity of the Effective Time: Reconfiguring Delaware’s Law of Standing Following Mergers and Acquisitions
S. Michael Sirkin; 69(2): 429-474 (February 2014)
This article examines the doctrine of standing as applied to mergers and acquisitions of Delaware corporations with pending derivative claims. Finding the existing framework of overlapping rules and exceptions both structurally and doctrinally unsound, this article proposes a novel reconfiguration under which Delaware courts would follow three black-letter rules: (1) stockholders of the target should have standing to sue target directors to challenge a merger directly on the basis that the board failed to achieve adequate value for derivative claims; (2) a merger should eliminate target stockholders’ derivative standing; and (3) stockholders xi of the acquiror as of the time a merger is announced should be deemed contemporaneous owners of claims acquired in the merger for purposes of derivative standing. Following these rules would restore order to the Delaware law of standing in the merger context and would advance the important public policies served by stockholder litigation in the Delaware courts.
Lucian A. Bebchuk and Allen Ferrell; 69(3): 671-698 (May 2014)
In the Halliburton case, the United States Supreme Court is expected to reconsider the ruling in the decision of Basic Inc. v. Levinson that, twenty-five years ago, adopted the fraud-on-the-market theory, which has since facilitated securities class action litigation. We seek to contribute to this reconsideration by providing a conceptual and economic framework for a reexamination of the Basic rule, taking into account and relating our analysis to the Justices’ questions at the Halliburton oral argument.
Equity Receivers and the In Pari Delicto Defense
Hon. Steven Rhodes and Kathy Bazoian Phelps; 69(3): 699-716 (May 2014)
Federal equity receivers are creations of equity. The in pari delicto doctrine is similarly a defense based in equity. When equity receivers are called upon to administer the assets of a receivership entity for the benefit of defrauded victims, courts sitting in equity must balance the needs of the victims with the rights of the defendants to assert the in pari delicto defense to litigation claims brought by the receiver against them. The competing equities reveal the great discretion that courts can exercise in permitting litigation claims to proceed in the face of the assertion of the in pari delicto defense. Courts, however, must also be mindful of a variety of issues and obstacles in deciding whether to allow the in pari delicto defense.
An Overview of the General Counsel’s Decision Making on Dispute-Resolution Strategies in Complex Business Transactions
E. Norman Veasey and Grover C. Brown; 70(2): 407-436 (Spring 2015)
This Article is an overview of the hard choices that face a general counsel (GC) when weighing the pros and cons of whether and when a particular complex business dispute is better suited for litigation in the public courtroom or through a carefully constructed alternate dispute-resolution (ADR) process, including mediation and/or arbitration. Is either choice inherently more expensive, time consuming, or problematic than the other? The obvious answer is that each of these decisions is fact-intensive, dependent on myriad factors, and neither choice is “inherently” better or worse than the other.
We have focused exclusively on complex commercial disputes between businesses and we analyze the issues that would likely be considered by the GC and other corporate decision makers in choosing and navigating the route that provides the best opportunity for optimal results in resolving a domestic or international business dispute. These dispute resolution choices often must be faced in the negotiation of the terms of a business transaction, and thus before there is a dispute.
We explore the pros and cons of how the panoply of dispute-resolution mechanisms may play out down the road. In doing so, we are mindful of the complicated job of the GC in foreseeing at the negotiation stage how the optimal dispute-resolution process should be analyzed and drafted.
We have learned through our experience, current discussions with GCs, and the abundant literature on the subject that there are divergent views about the efficacy of domestic arbitration, in particular. We believe that the bad anecdotal experiences of some general counsel with arbitration should not pre-ordain a generally negative bias. Nor should good experiences dictate a generally positive bias. Like many questions, the common-sense answer is that “it depends.”
SEC Administrative Proceedings: Backlash and Reform
Alexander I. Platt, 71(1): 1-52 (Winter 2015/2016)
The Securities and Exchange Commission’s aggressive prosecution of securities violations inside administrative proceedings (APs) has generated backlash. Key stakeholders are now attacking the agency’s enforcement program as illegitimate and a growing number of respondents charged in APs have launched broad constitutional challenges. Though these suits target deeply entrenched features of administrative adjudication, they have already begun to prove successful, and threaten significant transformations to the SEC and beyond.
Historically, the SEC’s enforcement architecture embodied respect for the principle that, holding all else equal, procedures ought to be commensurate with the stakes of the adjudication. After Dodd-Frank, the agency abandoned this principle. The backlash is, at least in part, attributable to and justified by this reversal.
The SEC should have done after Dodd-Frank what it had done after previous expansions of its administrative penalty powers: reestablish the equilibrium between penalties and procedures by revising its rules of practice that govern APs. The SEC’s recently proposed amendments to these rules are too little, too late. A bolder approach is required.
Appraisal Arbitrage—Is There a Delaware Advantage?
Gaurav Jetley and Xinyu Ji; 71(2): 427-458 (Spring 2016)
The article examines the extent to which economic incentives may have improved for appraisal arbitrageurs in recent years, which could help explain the observed increase in appraisal activity. We investigate three specific issues. First, we review the economic implications of allowing petitioners to seek appraisal on shares acquired after the record date. We conclude that appraisal arbitrageurs realize an economic benefit from their ability to delay investment for two reasons: (1) it enables arbitrageurs to use better information about the value of the target that may emerge after the record date to assess the potential payoff of bringing an appraisal claim and (2) it helps minimize arbitrageurs’ exposure to the risk of deal failure. Second, based on a review of the recent Delaware opinions in appraisal matters, as well as fairness opinions issued by targets’ financial advisors, we document that the Delaware Chancery Court seems to prefer a lower equity risk premium than bankers. Such a systematic difference in valuation input choices also works in favor of appraisal arbitrageurs. Finally, we benchmark the Delaware statutory interest rate and find that the statutory rate more than compensates appraisal petitioners for the time value of money or for any bond-like claim that they may have on either the target or the surviving entity.
Our findings suggest that, from a policy perspective, it may be useful to limit petitioners’ ability to seek appraisal to shares acquired before the record date. We also posit that, absent any finding of a flawed sales process, the actual transaction price may serve as a useful benchmark for fair value. We conjecture that, while the statutory interest rate may not be the main factor driving appraisal arbitrage, it does help improve the economics for arbitrageurs. Thus, the proposal by the Council of the Delaware Bar Association’s Corporation Law Section to limit the amount of interest paid by appraisal respondents—by allowing them to pay appraisal claimants a sum of money at the beginning of the appraisal action—seems like a practical way to address concerns regarding the statutory rate. However, paying appraisal claimants a portion of the target’s fair value up front is akin to funding claimants’ appraisal actions, which may end up encouraging appraisal arbitrage.
The Demand Review Committee: How It Works, and How It Could Work Better
Collins J. Seitz, Jr. and S. Michael Sirkin, 73(2): 305-318 (Spring 2018)
Stockholders must ordinarily make a demand on their board of directors before initiating litigation on the corporation’s behalf. But the litigation consequences of a stockholder demand—a binding concession of the board’s ability to impartially consider a demand—are so harsh in the ensuing litigation that stockholders rarely choose that path. The demand requirement is thus falling short of its promise as an internal dispute resolution mechanism. If, as we suggest, stockholders typically avoid making a demand and instead prefer to initiate litigation and raise demand futility arguments, no matter how weak, they deprive independent boards of the opportunity to consider the merits of potential litigation outside the courtroom. We propose a private-ordering solution, in which stockholders and boards can agree, if they choose, to reserve rights on demand futility arguments while a demand review process is undertaken. This would allow boards to engage with stockholders in the review process, and would replace some demand futility litigation with boardroom deliberation, thereby restoring the internal dispute resolution function to the demand requirement.
What Injures a Corporation? Toward Better Understanding Corporate Personality
J.B. Heaton, 73(4) 1031-1050 (Fall 2018)
Understanding what injures a corporation can help us better understand corporate personality. Traditional corporate injury is injury to corporate assets or profits. This makes sense, because without defining impairment to corporate assets and profits as corporate injury, most of what we think of as “essential” about a corporation—locking assets into a protected partition—would be impossible: (1) protecting the going concern value of the corporation; (2) maintaining creditor priority; and (3) contracting through the corporate form. More recent expansions of what constitutes corporate injury, including injuries to a corporation’s right to political speech (Citizens United) and religious freedom (Hobby Lobby), seem at first to fit poorly with existing corporate theory. But corporations can “lock in” and “partition” more than assets; they can partition beliefs and virtues as well. Viewed this way, existing corporate theory (and the idea of corporate injury as harm to whatever is partitioned by the corporate form) may provide more help in understanding corporate constitutional rights than previously recognized.
How Efficient Is Sufficient: Applying the Concept of Market Efficiency in Litigation Bradford Cornell and John Haut, 74(2) 417-434 (Spring 2019)
The concept of market efficiency has been adopted by courts in a variety of contexts. In reality, markets can never be perfectly efficient or inefficient, but exist somewhere in between depending on the facts and circumstances. Courts, therefore, face a problem in deciding how efficient is sufficient in any particular legal context. Because market prices incorporate the views of numerous market participants, courts have often been willing to presume that a market is efficient so long as the appropriate criteria are satisfied. However, those criteria are different for different types of cases, such as securities class actions, appraisal actions, and cram downs in bankruptcy.
Simple Insolvency Detection for Publicly Traded Firms
J.B. Heaton, 74(3) 723-734 (Summer 2019)
This article addresses current limitations of financial-market-based solvency tests by proposing a simple balance-sheet solvency test for publicly traded firms. This test is derived from an elementary algebraic relation among the inputs to the balance-sheet solvency calculation. The solvency test requires only the assumption that the market value of assets equals the sum of the market value of the firm’s debt plus the market value of the firm’s equity. The solvency test is a generated upper bound on the total amount of debt the firm can have and still be solvent or, alternatively, the minimum amount of stock-market capitalization the firm must have if it is solvent at current debt prices. The virtue of the method—apart from its ease of implementation—is that it makes possible the detection of balance-sheet insolvent firms notwithstanding the possibility that not all of the firm’s liabilities—including hard-to-quantify contingent liabilities—can be identified. As a result, the method allows for the detection of balance-sheet insolvent firms that otherwise might escape detection. The method proposed here can identify insolvent firms that should be retaining assets and not paying them out to shareholders as dividends or repurchases, identify stocks that brokers and investment advisers should treat as out-of-the-money call options that may be unsuitable investments, and can help auditors identify publicly traded firms that are candidates for going-concern qualifications and other disclosures.
The Myth of Morrison: Securities Fraud Litigation Against Foreign Issuers
Robert Bartlett, Matthew D. Cain, Jill E. Fisch, and Steven Davidoff Solomon; 74(4) 967-1014 (Fall 2019)
Using a sample of 388 securities fraud lawsuits filed between 2002 and 2017 against foreign issuers, we examine the effect of the Supreme Court’s decision in Morrison v. National Australia Bank Ltd. We find that the description of Morrison as a steamroller, substantially ending litigation against foreign issuers, is a myth. Instead, we find that Morrison did not significantly change the type of litigation brought against foreign issuers, which, both before and after this case, focused on foreign issuers with a U.S. listing and substantial U.S. trading volume. Although dismissal rates rose post- Morrison, we find no evidence that this was related to the decision. Settlement amounts and attorneys’ fees remained unchanged post-Morrison. We use these findings to theorize that Morrison was primarily a preemptive decision about standing that firmly delineated the exposure of foreign issuers to U.S. liability in response to the Vivendi case, which sought to expand the scope of liability for foreign issuers whose shares traded primarily in non-U.S. venues. When Morrison is placed in its true context, it is justified as a decision in line with administrative and court actions that have historically aligned firms’ U.S. liability to be proportional to their U.S. presence. Although Morrison had this defining effect, it did not change the litigation environment for foreign issuers, which was the oft-cited import of the decision. More generally, our analysis of Morrison also underscores how the decision has been mistakenly characterized as a case primarily about extraterritoriality rather than standing.
Focusing on Deterrence to Combat Financial Fraud and Protect Investors
Michael H. Hurwitz; 75(1): 1519-1550 (Winter 2019-2020)
This article discusses the harm to the economy and to investors caused by financial fraud and proposes concrete steps to combat such fraud through a credible policy of deterrence. The author notes that criminal prosecutions against the perpetrators of financial fraud has declined over the past decade or more and argues that this has weakened the ability of the government to deter those contemplating the commission of such crimes.
Uncovering the Hidden Conflicts in Securities Class Action Litigation: Lessons from the State Street Case
Benjamin P. Edwards and Anthony Rickey; 75(1): 1551-1570 (Winter 2019-2020)
Courts, Congress, and commentators have long worried that stockholder plaintiffs in securities and M&A litigation, and their counsel, may pursue suits that benefit themselves, rather than absent stockholders or the corporations in which they invest. Following congressional reforms that encouraged the appointment of institutional stockholders as lead plaintiffs in securities actions, significant academic commentary has focused on the problem of “pay to play”—the possibility that class action law firms encourage litigation by making donations to politicians with influence over institutional stockholders, and particularly public sector pension funds.
Loss Causation and the Materialization of Risk Doctrine in Securities Fraud Class Actions
Richard A. Booth; 75(2): 1791-1814 (Spring 2020)
In the context of a claim for securities fraud under SEC Rule 10b-5, most federal circuit courts have ruled or recognized that loss causation can be proven by an event that demonstrates an earlier statement by a defendant company to be false. In other words, corrective disclosure need not take the form of speech. Rather, a statement can be shown to be false by the materialization of a risk that was concealed by the company, and investors can be compensated for any losses they suffer as a result. Although this doctrine is well established, its ultimate effect is to overcompensate investors, thus encouraging excessive securities litigation and chilling voluntary disclosure.
Through the Decades: The Development of Business Courts in the United States of America
Lee Applebaum, Mitchell Bach, Eric Milby, and Richard L. Renck, 75(3): 2053-2076 (Summer 2020)
This article interprets the meaning of the term “business court” as it has developed through the variety of implementations and describes the successful development, and occasional failure, of those courts across the country.
Essay: The ABA’s Contribution to the Development of Business Courts in the United States
Christopher P. Yates, 75(3): 2077-2084 (Summer 2020)
More than a quarter-century ago, the ABA Business Law Section made a commitment to the development of business courts across the United States. From the formation of its Ad Hoc Committee on Business Courts in 1994 through the engagement with state officials and business-court judges for more than two decades, the Section has become a driving force behind the adoption and refinement of the business-court concept by an overwhelming majority of the states. In this article, the innovators and champions of business courts who took up the cause on behalf of the Section tell the story of how the Section played a central role in the success of business-court initiatives and how the Section works diligently today to maintain and build upon that success.