Legal Theory Blog

All the theory that fits.

New Papers on the Net

New Papers on the Net
Here is today’s roundup:

    Christopher Yoo (Vanderbilt) posts New Models of Regulation and Inter-Agency Governance, forthcoming in the Law Review of Michigan State University-Detroit College of Law. Here is the abstract:

      This symposium contribution explores how technological convergence and the shift towards access regulation are fundamentally transforming the basic tools and goals of telecommunications regulation. However, policy makers have largely ignored the manner in which access requirements can forestall the buildout of alternative transmission technologies. Simply put, compelling access discourages investment in new networks by rescuing firms that need network services from having to invest in alternative sources of supply. In addition, forcing incumbent carriers to share their networks cuts those who would like to construct alternative network facilities off from their natural strategic partners. As a result, access remedies can have the perverse effect of cementing existing monopolies into place.
      In addition, policy makers have largely overlooked how technological convergence and the shift towards access regulation have undercut the justification for employing cost-based methodologies when setting rates. The more appropriate step at this point would be to adopt the more economically sound approach of basing rates on market prices.

      Finally, the advent of convergence is also exerting pressure on the tendency under current law to regulate each communications technology as a universe unto itself. The impending shift to packet-switched architectures promises to cause all networks to become substitutes for one another. Indeed, it is possible to envision a world in which different network technologies act as complements rather than substitutes for one another, with different packets arriving in the house through the most efficient transmission media, a transformation that would pose its own share of regulatory challenges.

    Robert Thompson (Vanderbilt) posts two papers:

      Collaborative Corporate Governance: Listing Standards, State Law and Federal Regulation, forthcoming in the Wake Forest Law Review. From the abstract:

        The traditional view of corporate law as arising from state law, with federal law in a supporting role no longer describes the post Sarbanes-Oxleyt world. This paper presents modern corporate governance as a collaborative process between the federal government (mostly acting through the SEC), state law (mostly acting through the Delaware courts, but also including its legislature and those in other states) and the self-regulatory organizations such as the stock exchanges. The focus is on the third source, particularly the listing requirements of the New York Stock Exchange. The Reforms announced in 2002 portend a dramatic increase in the role of the listing requirement in defining American corporate governance. The interaction between the NYSE and state and federal law is heavily tilted toward its overlap with federal law. The pattern of NYSE regulation of the last decade is that the SEC chair makes a speech or a telephone call identifying a problem, the Exchange convenes a committee of experts and proposes a solution that is sent to the SEC and the various interested parties engage the Exchange and the SEC in discussions about what the law should be. Prominent examples include requirements for independent directors, shareholder approval of stock options, audit committee procedures and one share/one vote rules. This is a different process than what occurs in state law or in direct SEC regulation and it is becoming a larger part of American corporate governance.

      Corporate Governance After Enron: The First Year. Here is the abstract:

        In the aftermath of Enron and other corporate failures in the post-bubble economy, the menu of possible regulatory responses included federal regulation, state corporate law, or governance by self-regulatory organizations such as the stock exchanges. This commentary sets out the response of each actor in the first year after Enron and examines why state law chose to stand pat during this period. Part II examines a related problem posed by Enron – did it push the envelope in the use of separate entities as much as it appeared to do in accounting treatment? It compares Enron’s use of SPEs to more familiar uses of separate entities in piercing the corporate veil contexts and concludes that the traditional corporate remedies of piercing, bankruptcy, or personal liability are likely to be less effective than disclosure is addressing future abuses of the type that arose in Enron.

    James Cox (Duke) and Randall Thomas (Vanderbilt) post SEC Enforcement Actions for Financial Fraud and Private Litigation: An Empirical Inquiry. Here is the abstract:

      This paper examines the overlap between SEC securities enforcement actions and private securities fraud class actions. We begin with an overview of data concerning all SEC enforcement actions from 1997 to 2002. We find that the volume of SEC enforcement proceedings is relatively modest. We next examine the scope of the recently enacted “Fair Fund” provision that authorizes the SEC to designate civil penalties it recovers from defendants to benefit defrauded private investors. We conclude that this provision offers only limited potential relief for private investors. We complete this part of the paper with an analysis of the serious resource limitations faced by the SEC.

      The second portion of the paper contains an empirical analysis of the determinants of SEC enforcement actions and the overlap of private fraud suits and SEC enforcement proceedings. In bi-variate analysis, we find that: private suits with parallel SEC actions settle for significantly more than private suits without such proceedings; SEC enforcement actions target significantly smaller companies than private actions alone; private cases with parallel SEC actions take substantially less time to settle than other private cases; and private cases with parallel SEC actions have significantly longer class periods than other private actions. Finally, we create a model for estimating damages to compare settlement ratios in cases with parallel SEC actions to those in private actions. We find that one-fourth of all the private class action settlements occurring in suits that yield less than 10% of provable losses are settled for less than .02 percent of provable losses, but that there are no private actions with parallel SEC suits with such small settlements.

      In the final part of the paper, we conduct a multivariate regression analysis of the determinants of when SEC enforcement actions are filed. We find that the most highly significant determinant of SEC actions is financial distress. Estimated losses do not appear to be a statistically significant factor in the SEC’s decision to file these suits.

    Paul Edelman and Randall Thomas (Vanderbilt) post Voting Models, Corporate Elections and Takeover Bids. Here is the abstract:

      This paper examines corporate voting contests experimentally using a weighted voting model. We begin by providing a systematic treatment of weighted voting models as an analytical tool for legal policy. After this short intuitive guide to the basic concepts and techniques employed in these models, we then explore their use (and misuse) by the courts in the political arena. We continue this introduction by examining prior work using weighted voting models in the corporate setting. Here the literature has focused on two different aspects of corporate voting: the analysis of voting concentration and corporate control and, more recently, proxy contests for corporate control.
      In the next section, we engage in an in-depth analysis of the new models of corporate elections developed by Gilson & Schwartz and Bebchuk & Hart. In our critique, we show that both the Gilson & Schwartz approach and the Bebchuk & Hart paper are flawed. In particular, we find that the models used in Gilson & Schwartz employ unreasonable hypotheses and reach questionable conclusions, whereas we argue that the Bebchuk & Hart effort requires exceptionally strong hypotheses and very stringent mathematical assumptions to reach its conclusions.

      To develop a more realistic approach to these questions, we employ a probabilistic version of a standard weighted voting model that explicitly incorporates two critical features of corporate voting: first, that shares are normally voted in large blocks rather than in single shares; and second, that independent third party proxy voting advisors play an important, and often pivotal, role in determining the outcome of corporate elections. In addition, we explicitly incorporate information about the size of different corporate constituencies and their voting preferences. Using our model, we show experimentally how the distribution of shares among various investor constituencies will affect the outcome of different types of voting contests.

      Initially, we assume that the current legal regime applies so that corporate management determines whether to accept an unsolicited bid and can use a wide variety of anti-takeover defenses to forestall hostile bidders. We find that neither proxy contests, tender offers, nor combined proxy contests and tender offers will always lead to the desirable outcome for target company shareholders in any scenario. With each type of acquisition technique, bidders succeed in obtaining control of the target company in some value decreasing transactions, and are defeated in their acquisition efforts in some value increasing transactions. The implication is that, under current law, there will generally be some plausible basis for target company management to argue that it is value increasing to use defensive measures to preclude shareholder acceptance of a takeover bid.

      Finally, we study the effect on our results of adopting different theoretical perspectives on the proper role for shareholder voting. One alternative theory we examine is that target management should be barred from using defensive measures to stop an unsolicited takeover bid. Our model shows that if we adopt this theory, a change of control will occur in any case where the bid’s value significantly exceeds the target’s prior stock price. However, we are unable to accurately measure how this change will affect the size of premium offered in all bids, or the frequency of takeover bids, so that we cannot make social welfare comparisons between this regime and the current one.

      We then examine a second alternative theory that proposes shareholders should be able to vote within a reasonable period of time to remove any defensive tactic that impedes their ability to accept a takeover bid. This approach reduces all takeover battles to proxy contests occurring within at most thirteen months, the maximum length of time most states permit to elapse between annual meetings from the time of the announcement of the bid. In this situation, the shareholder vote will, in most circumstances, lead to an acceptance of value maximizing bids and a rejection of value decreasing offers. We endorse this position because it is at least as good as the current legal regime in insuring the maximization of shareholder vote, and better in that it permits shareholders to decide their own fate in more circumstances.

Additional papers of interest:

Lawrence Solum

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