Working Papers 426-450
426 Money Market Funds Run Risk: Will Floating Net Asset Value Fix the Problem? (Gordon, Jeffrey N. and Christopher M. Gandia) September 4, 2012
The instability of money market mutual funds, a relatively new form of financial intermediary that connects short term debt issuers with funders that want daily liquidity, became manifest in the financial crisis of 2007-2009. The bankruptcy of Lehman Brothers, a major issuer of money market debt, led one large fund to “break the buck” (that is, violate the $1 net asset value convention) and triggered a run on other funds that was staunched only by major interventions from the US Treasury and the Federal Reserve. One common reform proposal has been to substitute “floating NAV” for “fixed NAV,” on the view that MMF run risk was strongly affected by the potential to arbitrage between the “true” value of MMF assets and the $1 fixed NAV. It turns out that European MMFs are issued in two forms, “stable NAV” and “accumulating NAV,” which offer a reasonable proxy for the distinction between fixed and floating NAV. Thus the comparative run rate of these two MMF types during “Lehman week” offers a natural experiment of the effect of NAV “fixedness.” We find that the stable/accumulating distinction explains none of the cross-sectional variation in the run rate among these funds. Instead, two other variables are explanatory: yield in the period immediately prior to Lehman week, which we take as a proxy for the fund’s portfolio risk, and whether the fund’s sponsor is an investment bank, which we take as proxy for sponsor capacity to support the fund. We then argue that these findings strengthen the case for other stability-enhancing reforms.
427 I Like To Pay Taxes: Taxpayer Support for Government Spending and the Efficiency of the Tax System, (Listokin, Yair and David Schizer) August 24, 2012
This paper is based on a simple proposition, which we believe but cannot prove: If taxpayers support the way their tax dollars are spent, they are more likely to comply voluntarily and less likely to change their behavior to avoid tax. To show that our claim is plausible, we offer direct evidence from a literature involving experiments, draw on the more general economics and psychology literature on prosocial behavior, and also invoke philanthropy as a “real world” analogy; after all, charitable donors contribute money voluntarily (indeed, 2% of the U.S. GDP), largely because they believe in the way their contributions are used. Our claim has a number of concrete policy applications. The government should publicize popular uses of tax dollars, and go to particular lengths to avoid the negative publicity associated with waste. The government also should make broader use of taxes, like lotteries for education and the social security tax, which are dedicated to specific (popular) spending programs. In addition to proposing greater reliance on user fees, we offer a new justification for subsidiarity – the idea that services should be provided by the lowest level of government competent to do so – on the theory that taxpayers will feel more connected to a local or state government’s activities and less inclined to free ride within a homogeneous local community. We also suggest ways to adjust audit strategy and penalty structure to enhance prosocial motivations. Furthermore, we urge the government to seek voluntary contributions from taxpayers for programs they especially value. Finally, we explore the more controversial step of allowing taxpayers to allocate some of their tax bill to programs they value, and conclude that, at most, taxpayers should be permitted to do so only in a very limited way.
428 Fair Markets and Fair Disclosure: Some Thoughts on the Law and Economics of Blockholder Disclosure, and the Use and Abuse of Shareholder Power, (Emmerich, Adam O., Theodore N. Mirvis, Eric S. Robinson and William Savitt) August 27, 2012
In March 2011, our law firm (Wachtell, Lipton, Rosen & Katz) formally petitioned the Securities and Exchange Commission to modernize the rules promulgated under Section 13(d) of the Securities Exchange Act of 1934. The petition sought to ensure that the reporting rules would continue to operate in a way broadly consistent with the statute’s clear purposes, and that loopholes that have arisen by changing market conditions and practices since the statute’s adoption over forty years ago could not continue to be exploited by acquirers, to the detriment of the public markets and security holders. Among other things, the petition proposed that the time to publicly disclose acquisitions of over 5% of a company’s stock be reduced from ten days to one business day, given investors’ current ability to take advantage of the ten-day reporting window to accumulate positions well above 5% prior to any public disclosure, in contravention of the clear purposes of the statute.
In their article The Law and Economics of Blockholder Disclosure, Professors Lucian A. Bebchuk and Robert J. Jackson Jr. challenge the need for any modifications to the ten-day reporting window. Bebchuk and Jackson argue that, given the purported benefits of blockholder accumulations, extensive cost-benefit analysis should be done before Section 13(d)’s reporting rules are modified.
We argue that Bebchuk and Jackson offer no sound basis for the cost-benefit analysis they suggest nor any reason to question the need for the modernization of Section 13(d)’s reporting rules proposed in the petition. Specifically, we explain that Bebchuk and Jackson’s position follows largely from an erroneous interpretation of the statute’s legislative history and that the blockholder interests for which they advocate run directly contrary to Section 13(d)’s underlying purpose – “to alert the marketplace to every large, rapid aggregation or accumulation of securities.” We also discuss how developments in market liquidity and trading – which allow massive volumes of public company shares to be traded in fractions of a second – have made the Section 13(d) reporting regime’s ten-day reporting window obsolete, allowing blockholders to contravene the purposes of the statute by accumulating vast, control-implicating positions prior to any disclosure to the market. Finally, we explain how corporate governance developments since the passage of the Williams Act offer no reason to fail to update Section 13(d)’s reporting rules. To the contrary, we note that the blockholder reporting rules in other major capital markets jurisdictions only confirm the need to modernize the Section 13(d) reporting regime to ensure that it once again fully achieves the statute’s express purposes.
430 Constraints on Private Benefits of Control: Ex Ante Control Mechanisms Versus Ex Post Transaction Review, (Gilson, Ronald J. and Alan Schwartz) August 14, 2012
We consider how the state should regulate the consumption of pecuniary private benefits of control by controlling shareholders. These benefits have efficient aspects: they compensate the controlling shareholder for monitoring managers and for investing effort to create and implement projects. Controlling shareholders, however, have incentives to consume excessive benefits. We argue here that ex post judicial review of controlled transactions is superior to ex ante restrictions on the creation of controlled structures: the latter form of regulation eliminates the efficiencies as well as the abuses of the controlled company form. We also argue that controlling shareholders should be permitted to contract with minority investors over permissible private benefit consumption. Neither ex post regulation nor contract works well, however, when courts are inefficient and inexpert. Hence, our principal normative claim is that a European level corporate court should be created, whose jurisdiction parties can invoke in their charters or other contracts. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2129502
431 Shining Light on Corporate Political Spending, (Bebchuk, Lucian A. and Robert J. Jackson, Jr.) September 1, 2012
This Article puts forward the case for SEC rules requiring public companies to disclose their political spending. We present empirical evidence indicating that a substantial amount of corporate spending on politics occurs under investors’ radar screens and that shareholders have significant interest in receiving information about such spending. We argue that disclosure of corporate political spending is necessary to ensure that such spending is consistent with shareholder interests. We discuss the emergence of voluntary disclosure practices in this area, and show why voluntary disclosure is not a substitute for SEC rules. We also provide a framework for the SEC’s design of these rules. Finally, we consider and respond to the wide range of objections that have been raised to disclosure rules of this kind. We conclude that the case for such rules is strong, and that the SEC should promptly develop disclosure rules in this area. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2142115
432 Interbank Discipline (Judge, Kathryn) September 17, 2012
As banking has evolved over the last three decades, banks have become increasingly interconnected. This Article draws attention to an effect of this development that has important policy ramifications yet remains largely unexamined — a dramatic rise in interbank discipline. The Article demonstrates that today’s large, complex banks have financial incentives to monitor risk-taking at other banks, the infrastructure and information necessary to do so effectively, and mechanisms through which they can respond when a bank changes its risk profile. By drawing attention to these and other dynamics, the Article shows that banks impose meaningful, even if imperfect, discipline on one another. The rise of interbank discipline has both positive and negative ramifications from a social welfare perspective. Excessive risk taking is bad for parties exposed to a bank and harmful to social welfare. By penalizing a bank for taking excessive risks, other banks can deter such risk taking and help promote the stability of the financial system. The interests of banks and society, however, are not always so well aligned. Most notably, banks have an interest in maximizing the implicit government subsidy inherent in the possibility of a bailout. The Article shows how interbank discipline facilitates banks’ ability to benefit from, and thereby increase the size of, this subsidy. In this and other ways, interbank discipline may encourage banks to alter their activities in ways that increase systemic fragility. The regulatory implications are significant. The Article argues that we should reconsider bank oversight in light of interbank discipline and proposes some modest and more ambitious steps in that direction. By reducing the regulatory resources devoted to activities that the market is performing effectively, increasing the resources devoted to activities that regulators are uniquely situated or incentivized to address, and seeking to counteract the adverse effects of interbank discipline, bank oversight could be redesigned to more effectively promote the stability of the financial system.
433 Law and Finance in the Context of Crisis: The Imperative of Structural Vision, (Lothian, Tamara) September 27, 2012
This piece explores the worldwide response to the recent financial and economic crisis through a comparative analysis of financial crisis, regulation and reform in the US and in several emerging market countries. Two main ideas inform my argument. The first idea is the inadequacy of ways of dealing with the crisis that fail to enlist finance more effectively in the service of the real economy, rather than allowing it to serve itself, and that misunderstand globalization as an unyielding constraint on institutional experimentation at home. A wide range of historical and contemporary examples helps make the point. The second idea is the imperative of structural vision: the understanding of the consequences of different paths of institutional change as well as the imagination of new institutional alternatives. A deficiency in such vision is one of the chief flaws in the major currents of contemporary economics. A reformed practice of legal analysis can help redress this defect. The reform of finance and of its relation to production, viewed through the lens of structural vision, can serve as a point of departure for innovations useful to growth, inclusion and democracy.
434 Towards a Legal Theory of Finance, (Pistor, Katharna)
This paper develops the building blocks for a legal theory of finance. LTF holds that financial markets are legally constructed and as such occupy an essentially hybrid place between state and market, public and private. At the same time, financial markets exhibit dynamics that frequently put them in direct tension with commitments enshrined in law or contracts. This is the case especially in times of financial crises when the full enforcement of legal commitments would result in the self-destruction of the financial system. This law-finance paradox tends to be resolved by suspending the full force of law where the survival of the system is at stake; that is, at its core. Here, power becomes salient. This helps explain why finance is concentrated around ultimate lenders of last resort and why regulating finance’s core has become so elusive. It also holds lessons for future reforms. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2178066
435 The New Class Action Landscape: Trends and Developments in Class Certification and Related Topics, (Coffee Jr. , John C., and Alexandra D. Lahav)
In this memorandum, Professors Coffee and Lahav describe and assess the highlights of class certification rulings from 2005 to 2012, and track trends in approaches to certification.
436 Contractng About Private Benefits of Control, (Gilson, Ronald J., and Alan Schwartz)
The separation of control and ownership – the ability of a small group effectively to control a company though holding a minority of its cash flow rights – is common throughout the world, but also is commonly decried. The control group, it is thought, will use its position to acquire pecuniary private benefits – to take money – and this injures minority shareholders in two ways: there is less money and the controllers are not maximizing firm value. To the contrary, we argue here that pecuniary private benefits may compensate the control group for monitoring managers and otherwise exerting effort to implement projects. There is an optimal level of pecuniary private benefit consumption, we show, that maximizes the control group’s profits, induces constrained efficient controller effort levels and compensates public shareholders for funding the firm’s projects. This result assumes that a controlling group can credibly commit not to consume more than these efficient private benefit shares. When potential entrepreneurs cannot solve this credibility problem, some ex ante efficient firms fail to form because their potential principals cannot raise money. The ability of controllers to commit is increasing in the accuracy of judicial review of controlled transactions. Private contracting, we argue, would materially improve judicial accuracy. Our principal normative recommendation therefore is to demote corporate fiduciary law from mandatory to a set of defaults.
437 Technological Innovation, International Competition, and the Challenges of International Income Taxation, (Graetz, Michael J. and Rachael Doud)
No one today doubts the fundamental importance of technological development to economic growth. And there is a consensus that research and development, which is crucial to ongoing technological advances, is underproduced in the absence of government support. Substantial government support of technological advances is ubiquitous. Technological innovation — the development of intellectual property (IP) — has become the key element in building national wealth.
Policymakers throughout the world have enacted tax benefits for both R&D and the gains from innovation. Designing cost-effective methods of supporting technological innovations has, however, become substantially more difficult as the world economy has become more interconnected. Labor and capital mobility, along with cross-border trade, complicate matters substantially: they allow the location where R&D is performed and the location where income is earned to change in response to the nature and level of government support. Adding to the mix, the flexibility of MNEs to shift across national borders the locations of production of their IP, the ownership of their IP, and the locations of the income from IP, along with their ability to establish new corporations resident in tax-favorable jurisdictions, renders designing cost-effective incentives even more difficult. Devising appropriate tax rules for the costs of developing IP and for IP income has become the central challenge for international income taxation.
Fashioning appropriate national policies to further technological innovation has become herculean for governments that support such advances primarily to increase the wellbeing of their own citizens and residents. It is hardly surprising, therefore, that the variety of public policies that have emerged from contests among nations to capture many or all of these benefits for its citizens and residents sometimes have beggar-thy-neighbor aspects and often are hard to fathom, much less defend. The difficulties in evaluating such public policies are compounded when, as here, any such effort is fraught with empirical uncertainties.
Tax policies have taken center stage in national policy efforts to stimulate and attract R&D and to capture a share of the income from technological innovations. Here we examine the three primary tax policies supporting innovation: (1) incentives for R&D, (2) so-called patent boxes, and (3) proposals for tax benefits for “advanced manufacturing.” We begin by describing the current smorgasbord of incentives and the economic evidence concerning their efficacy. We then briefly describe common techniques used by MNEs to lower the income taxes on income from IP. After that, we assess the soundness of the various incentives and offer our recommendations about how the United States might respond to the challenges it now faces in promoting technological innovation. Based on our extensive examination of the economic evidence, we conclude that, at most, only R&D incentives are justified.
We also summarize the current proposals for limiting opportunities for USMNEs to shift IP income to low or zero-tax jurisdictions. In that connection, we offer new proposals for change that emphasize imposing U.S. tax based on U.S. sales. These kinds of proposals merit serious consideration when the U.S. Congress takes up business reform.
438 The Agency Costs of Agency Capitalism: Activist Investors and the Revaluation of Governance Rights, (Gilson, Ronald J. and Jeffrey N. Gordon) January 1013, Forthcoming 2013 Columbia Law Review
Equity ownership in the United States no longer reflects the dispersed share ownership of the canonical Berle-Means firm. Instead, we observe the reconcentration of ownership in the hands of institutional investment intermediaries, which gives rise to what we call “the agency costs of agency capitalism.” This ownership change has occurred because of (i) political decisions to privatize the provision of retirement savings and to require funding of such provision and (ii) capital market developments that favor investment intermediaries offering low cost diversified investment vehicles. A new set of agency costs arise because in addition to divergence between the interests of record owners and the firm’s managers, there is divergence between the interests of record owners – the institutional investors – and the beneficial owners of those institutional stakes. The business model of key investment intermediaries like mutual funds, which focus on increasing assets under management through superior relative performance, undermines their incentive and competence to engage in active monitoring of portfolio company performance. Such investors will be “rationally reticent” – willing to respond to governance proposals but not to propose them. We posit that shareholder activists should be seen as playing a specialized capital market role of setting up intervention proposals for resolution by institutional investors. The effect is to potentiate institutional investor voice, to increase the value of the vote, and thereby to reduce the agency costs we have identified. We therefore argue against recent proposed regulatory changes that would undercut shareholder activists’ economic incentives by making it harder to assemble a meaningful toe-hold position in a potential target.
439 Mapping the Future of Insider Trading Law: Of Boundaries, Gaps and Strategies, (Coffee, Jr., John C.) March 1, 2013, Forthcoming 2013 Columbia Business Law Review
The current law on insider trading is arbitrary and unrationalized in its limited scope in a number of respects. For example, if a thief breaks into your office, opens your files, learns material, nonpublic information, and trades on that information, he has not breached a fiduciary duty and is presumably exempt from insider trading liability. But drawing a line that can convict only the fiduciary and not the thief seems morally incoherent. Nor is it doctrinally necessary.
The basic methodology handed down by the Supreme Court in SEC v. Dirks and United States v. O’Hagan dictates (i) that a violation of the insider trading prohibition requires conduct that is 'deceptive' (the term used in Section 10(b) of the Securities Exchange Act of 1934), and (ii) that trading that amounts to an undisclosed breach of a fiduciary duty is 'deceptive.' This formula illustrates, but does not exhaust, the types of duties whose undisclosed breach might also be deemed deceptive and in violation of Rule 10b-5. Many forms of theft or misappropriation of confidential business information could be deemed sufficiently deceptive to violate Rule 10b-5. More generally (and more controversially), the common law on finders of lost property might be used to justify a duty barring recipients from trading on information that has been inadvertently released or released to them without lawful authorization. Still, current law has stopped short of generally prohibiting the computer hacker and other misappropriators who make no false representation.
This article surveys possible means by which to rationalize current law and submits that the SEC can and should expand the boundaries of insider trading by promulgating administrative rules paralleling and extending the rules it issued in 2000 (namely, Rules 10b5-1 and 10b5-2). Specific examples are suggested.
At the same time, this article acknowledges that the goal of reform should not be to achieve parity of information and that there are costs in attempting to extend the boundaries of insider trading to reach all instances of inadvertent release. Deception, it argues, should be the key, both for doctrinal and policy reasons
440 The Shale Oil and Gas Revolution, Hydraulic Fracturing, and Water Contaminaton: A Regulatory Strategy, (Merrill, Thomas W. and David Schizer) February 19, 2013
The United States is expected to become the world’s largest oil producer by 2020, overtaking Saudi Arabia, and the world’s top natural gas producer by 2015, surpassing Russia. In the past decade, energy companies have learned to tap previously inaccessible oil and gas in shale with “hydraulic fracturing” (“fracturing” or “fracking”), pumping fluid at high pressure to crack the shale and release gas and oil trapped inside. This “shale revolution” has created millions of jobs, enhanced our energy independence, and reduced U.S. greenhouse gas emissions by substituting natural gas for coal.
Even so, fracturing is controversial. It may undercut the renewable energy industry, exacerbate air pollution and congestion, and use significant amounts of water. The most unique risk, which is the focus of this Article, is the potential contamination of groundwater. The fluid used in fracturing contains toxic chemicals. There is little evidence so far that subterranean fracturing can directly contaminate groundwater, and this risk may never materialize. The layer of shale that is fractured is usually thousands of feet below the water table, with a buffer of dense rock or clay in between. But there are other ways in which fracturing might contaminate groundwater, including surface spills of fracturing fluid, improper handling of waste, and the migration of natural gas into water wells. Some of these risks are familiar from decades of conventional oil and gas production, while others are new.
In response, this Article proposes a strategy for regulating water contamination from fracturing. For issues that are already well understood, we would rely on best practices regulations. For issues that are unique to fracturing and are not yet well understood, we would rely on liability rules – and, specifically, a hybrid of strict liability and a regulatory compliance defense – to motivate industry to take precautions, develop risk-reducing innovations, and cooperate in the development of best practices regulations. To facilitate more accurate determinations of causation, we recommend information-forcing rules (e.g., requiring energy companies to test water quality before they begin fracturing). We also suggest other design features for the liability system, such as one-way fee shifting and provisions to ensure that defendants will not be judgment proof. To ensure that the regulatory regime draws on existing regulatory expertise and is both dynamic and tailored to local conditions, we recommend keeping the regulatory center of gravity in the states, instead of fashioning a new federal regime.
441 Comment Letter to: Financial Stability Oversight Council on Money Market Fund Reform, (Gordon, Jeffrey N.)
This letter on Money Market Fund Reform was submitted in response to the Financial Stability Oversight Council’s proposals of November 2012. I endorse the so-called “Minimum Balance at Risk Proposal,” in which sponsors would contribute or raise capital of one percent of a MMF’s assets while users would be subject to delayed redemption of three percent of their MMF account over $100,000. This approach could cause sponsors to internalize cost of portfolio security selection while forcing large MMF users to internalize some of the costs of running on the fund. The letter has one novel legal argument, which is that the Dodd-Frank Act itself appears to contemplate capital for MMFs. Since the practical effect of DFA's tightening of the Fed's emergency lending authority (Fed Res Act sec.13(3)) is to require a collateral haircut, MMFs (especially with fixed NAV) will need loss absorbing capital to access a Fed liquidity facility. If they do a repurchase agreement without capital, they may well break the buck; the requirement that the Fed evaluate the collateral may force a revaluation of portfolio assets that may threaten $1 fixed NAV at other MMFs as well as the borrowing Fund.
MMFs are a novel financial intermediary, which arose out of regulatory arbitrage with an appeal principally for retail users who wanted a better interest rate deal than banks could offer. Some years later, institutional users found MMFs. These are cash-laden parties such as non-financial corporations, pension funds, securities lender, and asset managers, that want more safety than what the official banking system offers and also unrestricted liquidity, all without paying the costs of systemic stability. That is not possible -- unless, as now, the taxpayers bear the costs when the systemic bill comes due. The appeal of MMFs is the offer of a credit-screened diversified portfolio of financial assets that is safer than deposits in a single bank but highly liquid. If that value proposition holds, then the small restriction on liquidity and remote loss-bearing contingency should not be a significant disincentive for the institutional MMF user.
442 Tax Advice for the Second Obama Administration, (Graetz, Michael J.)
Delivered January 18, 2013 as the keynote address at a conference cosponsored by Pepperdine Law School and Tax Analysts.
443 Assessing the Optimism of Payday Loan Borrowers, (Mann, Ronald J.) March 12, 2013
This essay compares the results from a survey administered to payday loan borrowers at the time of their loans to subsequent borrowing and repayment behavior. It thus presents the first direct evidence of the accuracy of payday loan borrowers’ understanding of how the product will be used. The data show, among other things, that about 60% of borrowers accurately predict how long it will take them finally to repay their payday loans. The evidence directly contradicts the oft-stated view that substantially all extended use of payday loans is the product of lender misrepresentation or borrower self-deception about how the product will be used. It thus has direct implications for the proper scope of effective regulation of the product, a topic of active concern for state and federal regulators.
444 Concentrated Ownership Revisited: The Idiosyncratic Value of Corporate Control, (Goshen, Zohar and Assaf Hamdani) March 4, 2013
This Article offers a new understanding of concentrated ownership — the prevalent form of corporate ownership around the world — by developing a framework for evaluating many corporate ownership patterns and exploring the resulting legal and economic implications. The predominant view within economic and legal scholarship contends that controlling shareholders’ incentive for holding a control block is their desire to extract private benefits of control. Our analysis, however, shows that corporate control is valuable for entrepreneurs wishing to secure the idiosyncratic value that they ascribe to their business idea, while consuming private benefits is the pathology of holding control. Specifically, we demonstrate that the controlling-shareholder ownership structure can be explained as an allocation of control and cash-flow rights balancing the controller’s freedom to pursue idiosyncratic value against minority shareholders’ need for protection from agency costs.
The idiosyncratic-value/agency-cost framework provides new insights for both theory and doctrine. As a matter of theory, we question the view that private benefits of control are vital for controlling shareholders, that improved monitoring or management explains the controlling-shareholder structure, and that the size of control premiums is a good proxy for the quality of investor protection. As a matter of doctrine, we explore the key features of corporate law for publicly-traded firms with controlling shareholders, and illustrate how corporate law doctrines are shaped, and should be shaped, by the inevitable tension between the controller’s need to secure idiosyncratic value and minority protection from agency costs. While the corporate law literature has focused solely on minority shareholders’ protection, we show that an equally important focus should be given to controllers’ rights.
445 Parallel Exclusion , (Hemphill, C. Scott and Tim Wu) March 19, 2013, Yale Law Lournal, Vol. 122, 2013
Scholars and courts have long debated whether and when "parallel pricing" — adoption of the same price by every firm in a market — should be considered a violation of antitrust law. But there has been a comparative neglect of the importance of "parallel exclusion" — conduct, engaged in by multiple firms, that blocks or slows would-be market entrants. Parallel exclusion merits greater attention, for it can be far more harmful than parallel price elevation. Setting a high price leaves the field open for new entrants and may even attract them. In contrast, parallel action that excludes new entrants both facilitates price elevation and can slow innovation. Reduced innovation has greater long-term significance for the economy. Moreover, parallel exclusion regimes may be more stable than parallel price-elevation regimes. A basic game-theoretic analysis reveals that the factors that leave price elevation vulnerable to breakdown do not apply as strongly to parallel exclusion. Indeed, in some instances, maintaining an exclusion scheme is a dominant strategy for each of the excluders. In such cases, the likelihood of collapse is even lower, yielding a potentially indefinite system of parallel exclusion. This Article proposes the recognition of parallel exclusion as a form of monopolization — subject to the strict limits already present in case law, including monopoly power, anticompetitive effect, and an absence of sufficient procompetitive justification. It also explains why parallel exclusion is a proper concern for merger policy, and why it is bad policy to automatically condemn certain boycotts without any evaluation of their anticompetitive effects.
446 Irredeemably Inefficient Acts: A Threat to Markets, Firms, and the Fisc, (Raskolnikov, Alex), March 28, 2013, Forthcoming, Georgetown Law Journal
This article defines and explores irredeemably inefficient acts — a conceptually distinct and empirically important category of socially undesirable conduct. While inefficient behavior is, no doubt, pervasive, the standard view holds that inefficient conduct may be converted into efficient one by forcing actors to internalize the external harms of their decisions. For some acts, however, such conversion is impossible. These acts are not just inefficient forms of otherwise socially beneficial activities — they are not just contingently inefficient. Rather, they are inefficient at their core; they reduce social welfare no matter what the regulator does. These irredeemably inefficient (or just irredeemable) acts are private, intentional, non-consensual transfers of money. While this definition certainly describes theft, it also covers churning and price fixing, market manipulation and option backdating, insider trading and tax shelters, to name just some examples. All these acts are socially undesirable in any form and at any level, yet all may be overdeterred if enforcement is imperfect. Overdeterrence is possible for two reasons. First, enforcement increases the costs of irredeemable acts that remain undeterred. Second, enforcement burdens efficient conduct that yields outcomes indistinguishable from those produced by irredeemable acts. These considerations (along with no need for the standard cost-benefits comparison) underlie the unique optimal deterrence analysis of irredeemable acts. Antitrust law, corporate law, and criminal law largely reflect the divide between contingently and irredeemably inefficient acts, as well as some of the more specific prescriptions following from this article’s inquiry. Securities and commodities regulation fails to recognize the same distinction despite a wide variety of irredeemable acts among securities and commodities law violations. While the tax policy implications of the proposed framework are limited, this framework helps to resolve a long-standing debate about tax shelter regulation.
447 Litigation Discovery and Corporate Goverance: The Missing Story About the "Genius of American Corporate Law," (Gorga, Erica and Michael Halberstam), March 28, 2013
Strikingly absent from the entire corporate governance and corporate litigation debate is a truly unique feature of American civil procedure that deserves special attention but has been overlooked entirely: the modern civil discovery regime. In this paper, we attempt to fill this gap. We argue that modern discovery – first established by the Federal Rules of Civil Procedure in 1938 – has had a profound impact on the evolution of corporate governance and the culture of corporate disclosure in the U.S.
The article shows that (1) litigation discovery, and its threat, have driven, and structured, the process of corporate shareholder litigation, (2) the information generated by discovery has stimulated the development of case law defining shareholder rights and managerial duties, (3) the episodic legal demands for detailed corporate internal information (and the threat of discovery) have induced incremental improvements in corporate governance practices, including more exacting decision procedures, internal monitoring, record-keeping, and disclosure, (4) highly developed, continuously evolving discovery practices have established templates for independent corporate internal investigations by boards and regulators, and (5) discovery has given regulators steady insight into changing corporate internal practices and patterns of wrongdoing to which regulators have responded with broad legal and regulatory changes.
The article concludes that litigation discovery serves, inter alia, as a form of ex post disclosure, which complements and enforces ex ante disclosure under the federal securities laws. These observations have important normative implications for legal transplants and the enforcement debate. The article cautions against legal transplants of U.S. style securities disclosure, aggregate litigation mechanisms, and other enforcement mechanisms, without considering appropriate tools for investigating corporate internal wrongdoing ex post. It also has implications for the empirical literature on U.S. shareholder litigation outcomes.
448 New Modes of Pluralist Global Governance (De Burca, Grainne, Robert O. Keohane and Charles F. Sabel), February 26, 2013
This paper describes three modes of pluralist global governance. Mode One refers to the creation and proliferation of comprehensive, integrated international regimes on a variety of issues. Mode Two describes the emergence of diverse forms and sites of cross-national decision making by multiple actors, public and private as well as local, regional and global, forming governance networks and “regime complexes,” including the orchestration of new forms of authority by international actors and organizations. Mode Three, which is the main focus of the paper, describes the gradual institutionalization of practices involving continual updating and revision, open participation, an agreed understanding of goals and practices, and monitoring, including peer review. We call this third mode Global Experimentalist Governance.
Experimentalist Governance arises in situations of complex interdependence and pervasive uncertainty about causal relationships. Its practice is illustrated in the paper by three examples: the arrangements devised to protect dolphins from being killed by tuna fishing practices; the UN Convention on the Rights of Persons with Disabilities; and the Montreal Protocol on the Ozone Layer. Experimentalist Governance tends to appear on issues for which governments cannot formulate and enforce comprehensive sets of rules, but which do not involve fundamental disagreements or high politics, and in which civil society is active. The paper shows that instances of Experimentalist Governance are already evident in various global arenas and issue areas, and argues that their significance seems likely to grow.
449 Fee Effects, (Judge, Kathryn), May 24, 2013
Intermediaries are a pervasive feature of modern economies. This article draws attention to an under-theorized cost arising from the use of specialized intermediaries — a systematic shift in the mix of transactions consummated. The interests of intermediaries are imperfectly aligned with the parties to a transaction. Intermediaries seek to maximize their fees, a transaction cost from the perspective of the parties. Numerous factors, including the requirement that a transaction create value in excess of the associated fees to proceed and an intermediary’s interest in maintaining a good reputation, constrain an intermediary’s tendency to use its influence in a self-serving manner. Nonetheless, these constraints are generally imperfect. As a result, when parties rely upon influential intermediaries, there is often a shift in the total mix of transactions consummated toward the transaction type that yields the greatest fee for the intermediary involved.
This “fee effect” does more than influence the allocation of gains from trade. The primary cost takes the form of a foregone gain, that is, the difference between the welfare gains produced by the transaction actually consummated and the greater gains that would have been produced had the transaction type not been biased by the intermediary’s self interest. Moreover, reliance upon financial intermediaries can give rise to externalities, altering how capital is allocated in socially costly ways.
The article’s contributions are two-fold. First, it provides a theoretical framework for assessing an intermediary’s tendency and capacity to use its influence in a way that affects the type of transaction consummated. This enables parallels to be drawn across disparate settings. Second, applying that framework, the article shows why fee effects may be particularly great in financial markets. In addition, the article considers ways to address fee effects. As a first step, the article suggests that policymakers and market participants should “follow the fees” to better understand the effects of intermediary influence.
450 The Case for an Unbiased Takeover Law (with an Application to the European Union), (Enriques, Luca, Ronald J. Gilson, and Alessio M. Pacces), May 1, 2013
Takeover regulation should neither hamper nor promote takeovers, but instead allow individual companies to decide the contestability of their control. Based on this premise, we advocate a takeover law exclusively made of default and menu rules supporting an effective choice of the takeover regime at the company level. For reasons of political economy bearing on the reform process, we argue that different default rules should apply to newly public companies and companies that are already public when the new regime is introduced. The first group should be governed by default rules crafted against the interest of management and of controlling shareholders, because these are more efficient on average and/or easier to opt out of when they are or become inefficient for the particular company. The second set of companies should instead be governed by default rules matching the status quo even if this favors the incumbents. This regulatory dualism strategy is intended to overcome the resistance of vested interests towards efficient regulatory change. Appropriate menu rules should be available to both groups of companies in order to ease opt-out of unfit defaults. Finally, we argue that European takeover law should be reshaped along these lines. Particularly, the board neutrality rule and the mandatory bid rule should become defaults that only individual companies, rather than member states, can opt out of. The overhauled Takeover Directive should also include menu rules, for instance a poison pill defense and a time-based breakthrough rule. Existing companies would continue to be governed by the status quo until incumbents decide to opt into the new regime.