It is easier to invest in the stock market now than it has ever been. With the proliferation of the Internet, online investing websites have nearly obliterated the need for stockbrokers and have given individuals the ability to invest in whatever they choose — for around seven dollars per trade, a person can own a share of almost any publicly traded company. While this is certainly a step forward for the world of investing, it does not come without risk. Relying solely on personal research and investing knowledge can lead to an undiversified portfolio and a lot of uncompensated risk. Investors learned this the hard way when the market began to fall in 2007. As a result, many young investors have become shell-shocked and wary of investing in the stock market. According to the Investment Company Institute, in 2005, 48 percent of people under age thirty-five said they were “willing to take substantial or above-average risks in their portfolios”–that number at the start of 2011 had fallen to 34 percent.
It is not necessary, however, to rely solely on one’s own investing prowess when trying to navigate the stock market. Trained professionals offer their services in many forms–almost always for a price. Mutual funds represent one of the most significant ways in which trained professionals are involved with the investment decisions of others. “A mutual fund is a pool of assets, consisting primarily of [a] portfolio [of] securities, and belonging to the individual investors holding shares in the fund.” In 2009, 43 percent of all households in the United States owned mutual funds, with an estimated total of 51,200,000 households invested in mutual funds. The total amount of assets in mutual funds in 2009 was over eleven trillion dollars. Clearly, many people rely on the abilities of mutual fund managers to guide their investment decisions. By purchasing shares in mutual funds, people can own shares of portfolios that are as diversified as they desire without having to pick investments on their own.
History has shown that the scholarly and regulatory focus on board composition and structure is a dangerously incomplete solution to the problems that have caused recent corporate failures. The media and corporate scholars have assigned much of the blame for the 2008 financial crisis and the Enron-era corporate scandals to corporate boards. The conventional diagnosis of these ills is that boards were largely at fault because they failed to effectively monitor corporate officers. Unfortunately the conventional diagnosis of the problem is incomplete and the policy prescriptions flowing from this faulty diagnosis are unlikely to address the very real problems that continue to plague corporate governance.
The principal problem is that most regulatory attempts fail to adequately consider an essential step in understanding the board’s relationship to corporate failure: the process by which boards monitor corporate performance. By relying on insights from a robust organization behavior literature, this Article demonstrates that the processes boards employ to undertake their monitoring function are in need of significant improvement. In other words, how boards engage in management monitoring should be the focus of corporate regulatory reform, more so than who sits on boards or how boards are structured.
The law of exclusionary vertical restraints–contractual or other business relationships between vertically related firms–is deeply confused and inconsistent in both the United States and the European Union. A variety of vertical practices, including predatory pricing, tying, exclusive dealing, price discrimination, and bundling, are treated very differently based on formalistic distinctions that bear no relationship to the practices’ exclusionary potential. We propose a comprehensive, unified test for all exclusionary vertical restraints that centers on two factors: foreclosure and substantiality. We then assign economic content to these factors. A restraint forecloses if it denies equally efficient rivals a reasonable opportunity to make a sale or purchase (depending on whether the restraint affects access to customers or inputs). Market foreclosure is substantial if it denies rivals a reasonable opportunity to reach minimum viable scale. When substantial foreclosure is shown, the restraint should generally be declared illegal unless it is justified by efficiencies that exceed the restraint’s anticompetitive effects.
Consumer contracts are pervasive. Yet, the promises that make up these contracts are becoming increasingly empty, as sellers reserve the power to modify their contracts unilaterally. While some modifications benefit both sellers and consumers, others increase seller profits at the consumer’s expense. The law’s goal should be to facilitate good modifications, while preventing bad ones. Currently this goal is not met. The problem is twofold. First, consumers fail to appreciate the risk of unilateral modification and thus fail to demand a commitment by sellers to avoid inefficient modifications. Second, and more important, even if consumers demand a commitment to make only mutually beneficial modifications, existing commitment mechanisms—consumer assent to modifications, judicial review of modifications, and seller reputation—are inadequate. We propose a novel commitment mechanism: adding Change Approval Boards (“CABs”) as parties to consumer contracts. These CABs would selectively assent to, or withhold assent from, contractual changes that sellers wish to make, according to each CAB’s modification policy. We envision a market for CABs—multiple CABs, each striking a different balance between flexibility and security, offering a range of modification policies from which consumers can choose. The market-based CAB system promises to deter abusive term changes while retaining the flexibility to change consumer contracts when change is justified.
Many people believe that excessive risk taking at large financial firms was an important cause of the financial crisis of 2007–2008 and that preventing another crisis requires improving risk-management systems at such institutions. One way to do this would be to use board oversight liability to hold directors personally liable for failing to properly monitor the risks that their firms are running. The purpose of this Article is to determine what role director oversight liability can efficiently play in improving risk-management practices at large financial firms.
A key contention of this Article is that previous treatments of this problem have largely failed to appreciate what risk managers at large financial firms actually do, and so the Article begins by explaining some of the financial models that risk managers typically use to measure the market risk and credit risk on portfolios of assets. A realistic appreciation of these models shows that the measurements of risk that they yield must necessarily incorporate paradigmatic business judgments, most importantly because these models aim to predict future results on the basis of historical data. In other words, the predictive ability of the models is founded on the business judgment that the future will resemble the past in relevant respects. Risk-management decisions are therefore always business decisions.
Historically, there existed two main fiduciary duties in corporate law, care and loyalty, and only violations of the duty of loyalty were likely to lead to liability. In the 1980s and 1990s, the Delaware Supreme Court breathed life into the duty of care, created a number of intermediate standards of review, elevated the duty of good faith to equal standing with care and loyalty, and announced a unified test for review of breaches of fiduciary duty. The law, which once seemed so straightforward, suddenly became elaborate and complex. In 2006, in the case of Stone v. Ritter, the Delaware Supreme Court rejected the triadic formulation and declared that good faith was a component of the duty of loyalty. In this and other respects, Delaware seems to be returning to a bifurcated understanding of the law of fiduciary duties. I believe that this is a mistake. This area of law is inherently complex and much too important to be oversimplified.
The current academic debate on the issue focuses on whether there should be two duties or three. In this Article, I argue that the question is misleading and irrelevant, but that if it must be asked, the best answer is that there are five duties—one for each paradigm of enforcement. In defending this claim, I explain the true nature of fiduciary duties and provide a robust framework for the discussion, implementation, and development of the law.
Using a dataset of proxy recommendations and voting results for uncontested director elections from 2005 and 2006 at Standard & Poor’s 1500 companies, we examine how advisors make their recommendations. Of the four firms we study—Institutional Shareholder Services (“ISS”), PROXY Governance, Inc. (“PG”), Glass, Lewis & Company (“GL”), and Egan-Jones Proxy (“EJ”)—ISS has the largest market share and is widely regarded as the most influential. We find that the four proxy advisory firms differ substantially from each other in their willingness to issue a withhold recommendation, in the factors that affect their recommendations, and in the relative weight of those factors. Specifically, ISS focuses on governance-related factors, PG on compensation-related factors, GL on audit/disclosure-related factors, and EJ on an eclectic mix of factors. To the extent these differences are understood, institutional investors can subscribe to those advisors whose recommendations best conform to the investors’ assessments of value-maximizing corporate governance. But if these differences are not known, then proxy advisors may lack accountability for—and can pursue their own agenda in making—their voting recommendations, thereby impairing the effectiveness of the shareholder franchise.
Consider the following hypothetical: Two businesses—X, a software company, and Y, a retailer—reach a typical agreement regarding a software license. After extended negotiations, a written, integrated agreement finalizes the deal; it states that X will license software to Y and provide related hosting and technical support services. It does not include, nor did the two parties ever discuss, implementation of the software. Some time after the agreement was made, Y attempts to compel X to implement the software. Y later argues in court that X made fraudulent oral promises that induced Y to sign the written agreement. Y claims that X additionally agreed to provide both a total cost of ownership guarantee, including implementation, and the assistance of its consulting and development personnel to implement the software. Y’s lawyers correctly realize that, in California, the courts have allowed extrinsic evidence of fraudulent promises when those promises are consistent with or independent of the written agreement, notwithstanding the Parol Evidence Rule (“PER”). Thus, while X can present its best argument that the promise to implement the software would directly contradict or vary the terms of the limited licensing contract, the outcome in court is still unpredictable. Unsuspecting X is in danger of being forced to bear a substantial burden for which it never intended to contract.
The fall of 2007 heralded a tumultuous time in the U.S. capital markets. The implosion of the subprime mortgage market disrupted the economy and caused the credit markets to dry up and become increasingly illiquid. Almost overnight, credit became both more expensive and more difficult to obtain as financial institutions became unwilling to extend financing. The credit securitization market was particularly affected, leaving many financial institutions with pending and existing loans that they could only securitize and sell, if at all, at a large loss. Faced with these potentially large losses, financial institutions began to balk at funding preagreed private equity acquisitions. This sudden, unexpected turn of events and the general revaluation and decline in stock prices it wrought led private equity firms to reassess their pending acquisitions—acquisitions which had been agreed to in more stable times. The private equity firms’ reevaluations were often unkind. Throughout the fall and into 2008, private equity firms repeatedly attempted to terminate their contractual obligations to acquire companies.
The material adverse change (“MAC”) clause is a contract provision that periodically dominates the headlines, usually in the wake of a major financial downturn, and the most recent downturn has not been an exception. A MAC clause dispute typically occurs when one side of an agreement no longer wants to complete a merger or acquisition, and often the stakes are high: in the midst of the credit crisis and economic turmoil that began in 2007, MAC disputes erupted in at least thirteen high-profile transactions—the four largest disputes ranging from $1.5 billion to $25.3 billion. As recently as fifteen years ago, the MAC clause was essentially an uncontroversial boilerplate provision, but the clause has since changed dramatically. This Note explores the modern MAC clause in the United States through a comparative analysis with the United Kingdom, which has effectively prohibited a transformation of the traditional MAC clause.