The definitive agreement in mergers and acquisitions (“M&A”) transactions is one of the most heavily negotiated agreements in the field of commercial contracts. Besides establishing basic terms, such as defining the target and setting the form and amount of consideration, both buyer and seller attempt to allocate risk in order to achieve an acceptable level of deal certainty. Between an agreement’s signing and its closing, weeks, if not months, can pass as the purchaser performs due diligence and the parties obtain the necessary voting and regulatory approvals. In the interim, either the purchaser or the target may have a change of heart or a decline in performance. One way of allocating such risk during this period is through the use of a Material Adverse Change (“MAC”) or Material Adverse Effect (“MAE”) clause. In essence, MAC clauses allow a party to the agreement—most often the purchaser—to walk away free of penalty if the other party experiences an adverse change that is sufficiently material. However, despite the apparent simplicity of such clauses, vague drafting and a dearth of case law have made issues of interpretation exceedingly imprecise and unpredictable.
Shareholder voting, once given up for dead as “a vestige or ritual of little practical importance,” has come roaring back as a key part of American corporate governance. Where once voting was limited to uncontested annual election of directors, it is now common to see short slate proxy contests, board declassification proposals, and “Say on Pay” votes occurring at public companies. The surge in the importance of shareholder voting has caused increased conflict between shareholders and directors, a tension well illustrated in recent voting battles. For example, Carl Icahn’s hedge fund opposed Michael Dell’s 2013 bid to take Dell, Inc. private, claiming that the price offered was too low. After a prolonged election battle, a change in the election rules, and a small increase in the deal price, shareholders ultimately voted for the deal. In a similar vein, a 2012 Say on Pay vote by Citigroup shareholders against chief executive officer Vikram Pandit’s $15 million pay package led to his departure and substantive changes to executive compensation, after which more than 90 percent of the firm’s shareholders approved its proposed executive pay scheme. Yet, despite the obvious importance of shareholder voting, none of the existing corporate law theories coherently justify it.
This Article seeks to clarify the relationship between contract law and promises of privacy and information security. It challenges three commonly held misconceptions in privacy literature regarding the relationship between contract and data protection—the propertization fatalism, the economic value fatalism, and the displacement fatalism—and argues in favor of embracing contract law as a way to enhance consumer privacy. Using analysis from Sorrell v. IMS Health Inc., marketing theory, and the work of Pierre Bourdieu, it argues that the value in information contracts is inherently relational: consumers provide “things of value”—rights of access to valuable informational constructs of identity and context—in exchange for access to certain services provided by the data aggregator. This Article presents a contract-based consumer protection approach to privacy and information security. Modeled on trade secret law and landlord-tenant law, it advocates for courts and legislatures to adopt a “reasonable data stewardship” approach that relies on a set of implied promises—nonwaivable contract warranties and remedies—to maintain contextual integrity of information and improve consumer privacy.
Three scandals have reshaped business regulation over the past thirty years: the securities fraud prosecution of Michael Milken in 1988, the Enron implosion of 2001, and the Goldman Sachs “ABACUS” enforcement action of 2010. The scandals have always been seen as unrelated. This Article highlights a previously unnoticed transactional affinity tying these scandals together—a deal structure known as the synthetic collateralized debt obligation involving the use of a special purpose entity (“SPE”). The SPE is a new and widely used form of corporate alter ego designed to undertake transactions for its creator’s accounting and regulatory benefit.
The SPE remains mysterious and poorly understood despite its use in framing transactions involving trillions of dollars and its prominence in foundational scandals. The traditional corporate alter ego was a subsidiary or affiliate with equity control. The SPE eschews equity control in favor of control through preset instructions emanating from transactional documents. In theory, these instructions are complete or very close thereto, making SPEs a real-world manifestation of the “nexus of contracts” firm of economic and legal theory. In practice, however, formal designations of separateness do not always stand up under the strain of economic reality.
You are approached by a dear friend who says, “I have a terrific business concept—diamond mining in Siberia. Just a pickaxe, divining rod, and some elbow grease. It’s going to be terrific. The problem is, I need a little bit of cash to get it off the ground. Any interest? I can offer you a share of the company.” Although you know little about Siberia or investing, you decide to invest. He sends you a sixty-five-page LLC operating agreement for Sub-Zero Mining, LLC (“it’s mostly boilerplate”), which you review briefly and sign. You send it back to him, along with a check for your investment.
Six months later, having heard nothing from your friend, you run into him, and he is driving a brand-new sports car. You ask him, “How did the mining in Siberia go?”
“It was terrific,” your friend explains. “I have more money than I know what to do with!”
Naturally, you ask for your share.
U.S. regulation of public investment companies (such as mutual funds) is based on a notion that, from a governance perspective, investment companies are simply another type of business enterprise, not substantially different from companies that produce goods or provide (noninvestment) services. In other words, investment company regulation is founded on what this Article calls a “corporate governance paradigm,” in that it provides a significant regulatory role for boards of directors, as the traditional governance mechanism in business enterprises, and is “entity centric,” focusing on intraentity relationships to the exclusion of super-entity ones. This Article argues that corporate governance norms, which came to dominate U.S. investment company regulation as a result of the unique history of U.S. investment companies, are poorly-suited to achieve the goals of investment company regulation. In particular, the corporate governance paradigm has given rise to a number of regulatory weaknesses, which stem from investment advisers’ effective control over investment company boards of directors and courts’ deference to state corporate law doctrine in addressing investors’ grievances. Accordingly, investment company regulation should acknowledge that investment companies are not merely another type of business enterprise with the same challenges and tensions arising from the separation of ownership and control that appear in the traditional corporate context. Toward that end, this Article contends that policymakers should view, and regulate, investment companies as an avenue through which investment advisers provide financial services (investment-advisory services, in particular) to investors–and should view investment company shareholders more as advisory customers than as equity owners of a firm. This “financial services” model of regulation moves past the entity focus of corporate governance norms and, therefore, permits dispensing with governance by an “independent” body such as the board of directors. More importantly, if adopted, this model would remedy some of the more significant problems plaguing U.S. investment company regulation.
In the early months of the financial crisis that started in August 2007, Citigroup suddenly had to take onto its balance sheet $25 billion of assets–which, due to subprime mortgage exposure, were worth on the market only a third the amount that Citigroup was required to pay for them. The reason for the appearance of these troubled assets on the bank’s balance sheet was a liquidity guarantee provided by Citibank from the time it originally sold the assets to protect short-term lenders from the possibility that their debt could not be refinanced at maturity. The Financial Crisis Inquiry Commission would conclude that such guarantees helped “bring the huge financial conglomerate to the brink of failure.”
The assets in question were collateralized debt obligations (“CDOs”), which package together a large number of loans and other debt products and use the income from those loans to pay returns to the investors in the CDOs. It is clear, however, that not all of the “loans” underlying Citibank’s CDOs were actual loans. Some of them were financial contracts called derivatives that promised payments based on the performance of a specific set of actual loans. That is, some of the underlying assets were not loans, but simply represented the promise of one financial institution to make payments to another.
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.