Suchergebnisse

This Article addresses the fundamental question of whether, as a matter of good policy, it is ever appropriate that a foreign issuer be subject to the U.S. fraud-on-the-market private damages class action liability regime, and, if so, by what kinds of claimants and under what circumstances. The bulk of payouts under the U.S. securities laws arise out of fraud-on-the-market class actions – actions against issuers on behalf of secondary market purchasers of their shares for trading losses suffered as a result of issuer misstatements in violation of Rule 10b-5. In the first decade of this century, foreign issuers became frequent targets of such actions, with some of these suits yielding among the very largest payouts in securities law history. The law determining the reach of the U.S. fraud-on-the-market liability regime against foreign issuers has since been thrown into flux. The Supreme Court's recent decision in the Morrison case adopted an entirely new approach for determining the reach of Rule 10b-5 in situations with transnational features. This new approach focused on whether the purchase was of a security listed on a U.S. exchange or occurred in the United States, in contrast to the previous focus on whether either conduct or effects of sufficient importance occurred in the United States. In almost immediate response, Congress, in the Dodd-Frank Act, reversed the Court's decision with respect to actions by the government and mandated that the SEC prepare a report concerning the desirability of doing the same with respect to private damages actions. This Article goes back to first principles to look at the basic policy concerns that are implicated by the reach of fraud-on-the-market class actions for damages, and to determine who, under a variety of circumstances relating to the nationality of the purchasers, the place of the trade, and the place of the issuer's misconduct, is ultimately affected by imposition of this liability regime on foreign issuers. The resulting analysis suggests a simple, clear rule likely to both maximize U.S. economic welfare and, by also promoting global economic welfare, foster good foreign relations. The U.S. fraud-on-the-market class action liability regime should not as a general matter be imposed upon any genuinely foreign issuer, even where the claimant is a U.S. investor purchasing shares in a U.S. market or where the issuer engages in significant conduct in the United States relating to the misstatement. The only exception would be a foreign issuer that has agreed, as a form of bonding, to be subject to the U.S. regime. This Article then charts a practical path to reform based on this simple rule. It assesses the attractions of, and problems with, the two competing alternatives – using the Morrison rule and returning to the conduct/effects test – and explores the possibilities for reform through the courts, SEC rulemaking, and legislation.

Civil damages liability for securities law periodic disclosure violations has come under attack, particularly fraud-on-the-market class-action lawsuits for investor losses incurred in connection with trading in the secondary market when the issuer has not sold shares. The main line of attack has been the weakness of the compensatory rationale for such suits. Without a compensatory justification, the attackers suggest, the availability of this cause of action is hard to defend given the very substantial use of social resources involved in the litigation that it generates. The critics are right concerning the weakness of the compensatory justification for civil liability. They ignore, however, a second potential justification: deterrence. This Paper considers the deterrence justification for civil liability. The basic question is whether civil liability should provide at least part of the system of incentives for compliance with securities-law periodic disclosure rules, or whether reliance solely on governmentally imposed administrative and criminal sanctions would be better. In most areas of public regulation, enforcement is solely governmental. There are exceptions, however, where government enforcement is supplemented by civil liability. Antitrust, consumer law, environmental law, and governmental procurement fraud prevention are prominent examples in the United States. From a social-policy perspective, is it desirable to include securities disclosure regulation among these exceptions? The analysis here should usefully inform both the ongoing debate concerning securities class-action-lawsuit reform in the United States and discussions abroad concerning increasing the use of civil liability in other countries.

This Article explores the efficient design of civil liability for mandatory securities disclosure violations by established issuers. An issuer not publicly offering securities at the time of a violation should have no liability. Its annual filings should be signed by an external certifier—an investment bank or other well-capitalized entity with financial expertise. If the filing contains a material misstatement and the certifier fails to do due diligence, the certifier should face measured liability. Officers and directors should face similar liability, capped relative to their compensation but with no indemnification or insurance allowed. Damages should be payable to the issuer, not traders in its shares, because the true social harm from issuer misstatements is poor corporate governance and reduced liquidity. A trader is as likely to be a gainer by selling, as a loser by buying, at the misstatement-inflated price. An issuer publicly offering securities at the time of a violation should be liable to purchasers for the resulting inflation in price. Such liability is an antidote to what otherwise would be an extra incentive not to comply. This design would increase incentives for U.S. issuers to comply with periodic disclosure rules. At the same time, litigation-expensive fraud-on-themarket class actions would be eliminated. So would underwriter liability for lack of due diligence, a sharply diminishing spur for disclosure given the speed of modern offerings. For countries considering implementation of securities disclosure civil liability systems for the first time, this design helps them get it right from the start.

The United States was hit by a wave of corporate scandals that crested between late 2001 and the end of 2002. Some were traditional scandals involving insiders looting company assets -- the most prominent being Tyco, HealthSouth, and Adelphia. But most were what might be called "financial scandals": attempts by an issuer to maximize the market price of its securities by creating misimpressions as to what its future cash flows were likely to be. Enron and WorldCom were the most spectacular examples of these financial scandals. In scores of additional cases, the companies involved and their executives were sued by the Securities and Exchange Commission ("SEC"), and, in a number, executives were criminally prosecuted. Hundreds of issuers were forced to restate their financial statements. Why did this rash of financial scandals occur and what lessons for reform can be learned from the explanation? These are the questions addressed by Professor John Coffee in Gatekeepers: The Professions and Corporate Governance.

My analysis of the legal challenges posed by the growth of MNEs is based on an examination of a number of the examples used by Avi-Yonah to illustrate the working of his framework: piercing the corporate veil for mass torts (as in the Bhopal toxic chemical release), bribery, bankruptcy, child labor and antitrust. My approach focuses on the ways in which MNEs are special. To what extent do particular forms of behavior occurring within MNEs raise regulatory problems similar to problems raised by the same behavior occurring within other institutional arrangements, and to what extent does it raise problems that are different? Failure to ask these questions risks having the mere fact that a behavior occurs within an MNE obscure the most fundamental features of the question of who should decide whether and how to regulate the behavior. Only where the involvement of an MNE raises special problems is the application of MNE law even potentially justified. Part I is devoted to an examination of Avi-Yonah's Bhopal, bribery, bankruptcy, child labor and antitrust examples. It will employ the assumption that the governments of the countries involved act to maximize the welfare of their citizens when regulating purely domestic versions of the same behaviors. Part II briefly considers whether the rise in MNEs particularly undermines this assumption and how my conclusions might change if it were abandoned.

The corporate governance scandals of 2003 have brought renewed focus on mandatory disclosure. One of the most fundamental questions relating to this kind of regulation is the choice of regulatory area. The United States initially faced this question in the 1930s when, after intense debate, it decided to move from an exclusively state-based system to one primarily relying on federal regulation. It is a hot issue today as well. The countries of Europe, for example, are currently deciding the extent to which the European Community, rather than its member states, should determine securities disclosure in Europe. Canada is deciding whether to follow the path taken by Australia in the 1980s and to enlarge the role of the federal government in a system that has traditionally left disclosure regulation primarily to the provinces. Also, advocates of issuer choice are urging the United States to reconsider its 1930s decision and to give issuers the option to choose among a reinvigorated set of state regulatory regimes. The issuer-choice school of thought is influencing the debates in Europe and Canada as well. Finally, other advocates are pushing for a move in the opposite direction, arguing that standards for issuer disclosure should be set at a global level. This Article constructs an economic-efficiency based theory of optimal regulatory areas for securities disclosure. While larger political and constitutional considerations unrelated to efficiency will inevitably also play a role in the resolution of the debates recounted above, efficiency considerations are important because they go to the capacity of capital markets to promote the generation of real wealth. The theory developed here can help identify the efficiency-related tradeoffs involved in choosing one level of government versus another and the information that is needed to choose intelligently.

This article responds to Professor Romano's piece in this issue. It concerns our ongoing debate with regard to the desirability of permitting issuers to choose the securities regulation regime by which they are bound. Romano favors issuer choice, arguing that it would result in jurisdictional competition to offer issuers share value maximizing regulations. I, in contrast, believe that abandoning the current mandatory system of federal securities disclosure would likely lower, not increase, US welfare. Each issuer, I argue, would select a regime requiring a level of disclosure less than is socially optimal because its private costs of disclosure would be greater than the social costs of such disclosure. Professor Romano and I agree on most of the basic analytic building blocks for deciding whether issuer choice is a desirable reform: belief in analyzing the problem in terms of the broadly accepted principles of modem financial economics; recognition that disclosure has costs as well as benefits; and acknowledgment that incentives exist for issuers to provide at least some disclosure. We nevertheless reach the opposite conclusion on the desirability of issuer choice. To start, Romano believes that issuers' private costs of disclosure will not generally be greater than the social costs of such disclosure, whereas I show they will be. Romano argues as well that this is a special case in which any divergence of private and social costs that does exist will not lead to a market failure, at least one possibly correctable by public regulation. I show her argument to be unpersuasive. Finally, Romano interprets the existing empirical evidence as proving mandatory disclosure's lack of social value, while I show that the evidence in fact does not point in either direction. Where, as here, the theoretical case for the existence of a market failure is strong and the current program for dealing with it is widely admired, the advocate of change should have the burden of proof. Professor Romano has not met this burden. If she is serious about advancing her proposal for issuer choice, she needs to show that despite the market failure inherent in issuer choice, there is inevitably an even greater failure in the regulatory response. Absent such a showing, mandatory disclosure should be retained.

One of the most distinctive features of U.S. business law is the stringent requirements of ongoing disclosure imposed on issuers of publicly traded securities. This scheme usually has been justified as necessary to protect investors from making poor trading decisions as a result of being uninformed. Little scholarly attention, however, has been paid to the corporate governance effects of such required disclosure. In analyzing these effects, this article concludes that required disclosure can improve corporate governance in important ways. Indeed, improving corporate governance, not investor protection, provides the most persuasive justification for imposing on issuers the obligation to provide ongoing disclosure. Before delving further into this topic, it is important to define more precisely the terms "required disclosure" and "corporate governance." "Required disclosure," as used in this article, means any legal obligation that requires an issuer's management to provide, on a regular basis, information that it otherwise might not be inclined to provide. In the United States, the primary source of required disclosure is the periodic disclosure requirements imposed on publicly traded companies under the Securities and Exchange Act of 1934 ("Exchange Act"). Other sources of required disclosure include the law of the issuer's state of incorporation, the rules of the stock exchange on which the issuer's shares are listed, and the issuer's articles of incorporation. The term "corporate governance" refers to the myriad mechanisms that shape the structure of incentives, disincentives, and prohibitions under which an issuer's management makes decisions. This inquiry will be confined in two respects. First, while disclosure can influence corporate governance in ways that impact a variety of interests — including labor, environmental quality, and the local community in which the issuer operates — the focus here will be exclusively on shareholder welfare. Second, the concern here is with the corporate governance of ...

This article demonstrates that required disclosure can play an important role in corporate governance. It assists shareholders in effectively exercising their voting franchise and enforcing management's fiduciary duties. It also affects positively four of the economy's key mechanisms for controlling corporate management: the market for corporate control, share price-based managerial compensation, the cost of capital, and monitoring by external sources of finance. In so doing, it improves the selection of proposed new investment projects in the economy and the operation of existing facilities. Finally, it may improve managerial performance simply by forcing managers to become more aware of reality.

This article addresses the appropriate reach of the US mandatory securities disclosure regime. While disclosure obligations are imposed on issuers, they are triggered by transactions; the public offering of, or public trading in, the issuers' shares. The barriers to a truly global market for equities continue to lessen: financial information is becoming increasingly globalized and it is becoming increasingly inexpensive and easy to effect share transactions abroad. It is concluded that capital allocation improvement and managerial agency cost reduction is the only viable goal for disclosure regulation in a world with a global market for securities. It is recommended that the reach of the US disclosure regime be determined by the nationality of the issuer.