Tag: Corporate Law

Rethinking the Material Adverse Change Clause in Merger and Acquisition Agreements: Should the United States Consider the British Model? – Note by Andrew C. Elken

From Volume 82, Number 2 (January 2009)
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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.

 

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Corporate Law Preemption in an Age of Global Capital Markets – Article by Chris Brummer

From Volume 81, Number 6 (September 2008)
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At the heart of the extensive literature on corporate-law federalism is the belief that federalism engenders regulatory competition and federalization eliminates it. Federalism, a mode of governance where states act as providers of corporate law, is said to drive states to compete for charters. By contrast, federalization, which occurs when the federal government promulgates law, preempts state-level competition. Consequently, scholars who believe that regulatory competition promotes the provision of “good” laws have long railed against federal securities statutes like Sarbanes-Oxley that nationalize elements of traditional (state) corporate law. Meanwhile, other scholars have lauded preemptive securities regulation, arguing that federal intervention prevents the dismantling of regulatory standards and a race to the bottom.

 

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Torts v. Contracts: Can Microsoft Be Held Liable to Home Consumers for Its Security Flaws? – Note by Emily Kuwahara

From Volume 80, Number 5 (July 2007)
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In January 2003, the Slammer worm hit the Internet. Five of the Internet’s thirteen root-name servers shut down. Three hundred thousand cable modems in Portugal went offline, all of South Korea’s cell phone and Internet services went down, and Continental Airlines cancelled flights from its Newark hub due to its inability to process tickets. It took only six months after the disclosure of a security flaw for a virus writer to write the 376 byte virus. When it unleashed, it took ten minutes to infect ninety percent of vulnerable systems.

The flaw was a buffer overflow in the Microsoft SQL Server 2000 software. Because the code is embedded in other Microsoft products, not all users were even aware that their systems were running a version of SQL Server. Unfortunately, this was a well-known, preventable security flaw. Moreover, Microsoft had released a patch for the flaw exploited by Slammer six months before the attack. Despite the widespread effects, no flood of lawsuits ensued.

 

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Room Enough for the Do-Gooders: Corporate Social Accountability and the Sherman Act – Note by Sarah Rackoff

From Volume 80, Number 5 (July 2007)
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Congress passed the Sherman Act in 1890 to combat the monopolies, trusts, and pooling arrangements that arose as businesses expanded in the wake of the Industrial Revolution. The purpose of the Act was to prohibit the price gouging effects that resulted from the cartel-like behavior of rapidly growing businesses, best represented by the controlling – and later, declared illegal – position of the Standard Oil Company. The nation resented growing corporations that “[s]eemingly at will…could raise prices to consumers, cut the wages of labor, favor some customers over others, and control the supply of basic commodities.” President Cleveland emphasized the need for legislation to protect average consumers stating, “Corporations, which should be the carefully restrained creatures of the law and the servants of the people, are fast becoming the people’s masters.” Legislators hoped that the Sherman Act would be a solution to these ills and that consumers, and later workers, would be protected from the power being amassed by corporations.

These Populist sentiments resonate over a hundred years later as activists, nongovernmental organizations (“NGOs”), and multinational corporations (“MNCs”) seek solutions to similar backlashes against the activities of behemoth companies. President Cleveland’s concerns are discernible as consumers demand greater accountability and protection from major corporations. The demands for reform, however, now come directly from consumers and NGOs, rather than legislators. Moreover, the sought after regulations to limit corporate excesses are being self-imposed in the wake of such pressure. The private sector is developing creative solutions to address the abuses that resulted from the rapid globalization of commerce and production.

 

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The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership – Article by Henry T.C. Hu & Bernard Black

From Volume 79, Number 4 (May 2006)
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Corporate law generally makes voting power proportional to economic ownership. This serves several goals. Economic ownership gives shareholders an incentive to exercise voting power well. The coupling of votes and shares makes possible the market for corporate control. The power of economic owners to elect directors is also a core basis for the legitimacy of managerial authority. Both theory and evidence generally support the importance of linking votes to economic interest. Yet the derivatives revolution and other capital markets developments now allow both outside investors and insiders to readily decouple economic ownership of shares from voting rights. This decoupling, which we call the “new vote buying,” has emerged as a worldwide issue in the past several years. It is largely hidden from public view and mostly untouched by current regulation.

Hedge funds have been especially creative in decoupling voting rights from economic ownership. Sometimes they hold more votes than economic ownership – a pattern we call “empty voting.” In an extreme situation, a vote holder can have a negative economic interest and, thus, an incentive to vote in ways that reduce the company’s share price. Sometimes investors 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 situation “hidden (morphable) ownership” because the economic ownership and (de facto) voting ownership are often not disclosed.

This Article analyzes the new vote buying and its potential benefits and costs. We set out the functional elements of the new vote buying and develop a taxonomy of decoupling strategies. We also propose a near-term disclosure-based response and outline a menu of longer-term regulatory choices. Our disclosure proposal would simplify and partially integrate five existing, inconsistent 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 discuss strategies focused on voting rights, voting architecture, and supply and demand forces in the markets on which the new vote buying relies.

 

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Social Ties in the Boardroom: Changing the Definition of Director Independence to Eliminate “Rubber-Stamping” Board – Note by Rachel A. Fink

From Volume 79, Number 2 (January 2006)
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The new millennium ushered in a parade of corporate scandals. The succession of scandals, which began with the collapse of Enron, revealed a deep-seated pattern of disregard for shareholders’ interests. In response to these events and the widespread public outcry that ensued, Congress examined corporate board structure and senior management and passed the Sarbanes-Oxley Act (“SOX”) in 2002 to try to remedy problems of accountability. Even after SOX was passed, corporate governance experts continued to study the role of a board of directors and how that role may be modified in order to prevent future scandals and to protect shareholders adequately. They have analyzed many aspects of the board, ranging from the size, to whether the chief executive officer (“CEO”) should be the chairman, to the importance of truly independent directors.

True director independence is the critical inquiry. An independent director is a type of gatekeeper, providing a check on the CEO’s power, evaluating and criticizing business decisions, and ultimately protecting shareholders’ interests. All of the companies involved in the recent corporate scandals shared one characteristic – they had directors who were not truly independent.

 

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Corporate Inversions: A Symptom of a Larger Problem, the Corporate Income Tax – Note by James Mann

From Volume 78, Number 2 (January 2005)
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A corporate inversion is a paper transaction in which an American corporation reincorporates in a foreign nation without moving any of its operations to that country. The principle reason that a corporation will invert is to save money on taxes, in some cases as much as $60 million annually. Politicians, believing these companies are reincorporating in a foreign country to evade taxes, have introduced numerous bills to try to stop these companies from moving overseas. Senator John Kerry, the 2004 Democratic presidential nominee, stated that he plans to stop inversions within 500 days of his election to office. These corporations, however, have demonstrated that they will not give up these tax savings without a fight. Leucadia National Corp., a company that underwent an inversion in 2002, has hired a high-priced lobbying firm to block congressional efforts to stop inversions.

Members of Congress, believing that inverted corporations should be punished for renouncing their citizenship and their executives should be taxed for making this unpatriotic decision, have proposed complex legislation designed to close this tax loophole. Unfortunately, these solutions will not work. In reality, inversions are only a symptom of a much larger problem: American corporations are uncompetitive in foreign nations because of the corporate income tax. Today, the United States taxes corporate earnings at a rate of approximately 35%. Of sixty-nine countries surveyed as of January 2004, only Japan had higher corporate tax rates. These higher tax rates have yielded an inefficient result: some companies have committed transactions with the sole purpose of reducing their tax liabilities.

 

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Law’s Signal: A Cueing Theory of Law in Market Transition – Article by Robert B. Ahdieh

From Volume 77, Number 2 (January 2004)
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Securities markets are commonly assumed to spring forth at the intersection of an adequate supply of, and a healthy demand for, investment capital. In recent years, however, seemingly failed market transitions—the failure of new markets to emerge and of existing markets to evolve—have called this assumption into question. From the developed economies of Germany and Japan to the developing countries of central and eastern Europe, securities markets have exhibited some inability to take root. The failure of U.S. securities markets, and particularly the New York Stock Exchange, to make greater use of computerized trading, communications, and processing technologies, meanwhile, seems to suggest some market resistance to technological modernization. In light of this pattern, one must wonder: How are strong markets created and maintained, and what might be law’s role in this process?

This Article attempts to articulate a model for understanding the needs of efficient market transition and the resulting role of law in that process. Specifically, it suggests a “cueing” function for law in market transition. Grounded in largely ignored lessons of game theory and in the microeconomic analysis of so-called network effects, cueing theory identifies the coordination of market participants’ expectations as law’s central role in market transition. Building on recent legal literature on private regulation, social norms, and the expressive function of law, this theory suggests that in securities market transition—whether it be market creation in central and eastern Europe or market restructuring in the United States—law primarily serves to convene, encourage, inform, and facilitate.

A cueing role for law constitutes an important extension of traditional conceptions of what law does, particularly in securities regulation, but in other areas as well. Regulatory cues are neither coercive nor outcome determinative and involve a close intertwining of public and private regulation. The exceptional character of law in this context, and the recent growth in areas where regulatory cues might have fruitful application, may explain why such a role has not previously been analyzed. Yet in securities markets and other industries exhibiting network economies—from electricity transmission and interstate transportation to telecommunications and the Internet—a cueing function for law may be central to efficient transition. It may explain much of why “law matters” in the modern economy.

 

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