In its most recent Halliburton II decision, the Supreme Court rejected an effort to overrule its prior decision in Basic Inc. v. Levinson. The Court reasoned that adherence to Basic was warranted by principles of stare decisis that operate with “special force” in the context of statutory interpretation. This Article offers an alternative justification for adhering to Basic—the collaboration between the Court and Congress that has led to the development of the private class action for federal securities fraud. The Article characterizes this collaboration as a lawmaking partnership and argues that such a partnership offers distinctive lawmaking advantages.
Halliburton II offered a compelling illustration of the lawmaking partnership, as Congress and the Court together used the Basic decision as a building block to enable and then refine private securities fraud class actions. Notably, Congress took affirmative steps through legislation—the Private Securities Litigation Reform Act and the Securities Litigation Uniform Standards Act—to balance the competing policy objectives of allowing effective enforcement while limiting the potential for abusive litigation. The process illustrates the three critical components of a lawmaking partnership: an open-textured statute, sequential adjustments to the statutory scheme by both the Court and Congress, and a set of common objectives to guide the lawmaking enterprise.
This Article argues that the existence of a lawmaking partnership offers the Court the freedom to engage in explicit policy analysis of a type that is inconsistent with a traditional textualist approach. Put differently, the partnership operates as a type of rule of construction allowing the Court to engage in its own analysis of the interpretation that will best further congressional objectives.
The lawmaking partnership also offers distinctive lawmaking advantages, including efficiency, political insulation, and comparative institutional competence. An exploration of these advantages can be used to identify the potential value of the lawmaking partnership beyond federal securities fraud.
The fraud-on-the-market doctrine adopted in Basic Inc. v. Levinson (“Basic”) allows the plaintiff suing under Rule 10b-5 to satisfy the reliance requirement by showing that the market in which the security was traded was efficient and that she purchased the security at the market price during the period of the misrepresentation. If she succeeds, the plaintiff is entitled to two presumptions: first, that the misrepresentation distorted the price of that security, and second, that she purchased the security in reliance on that misrepresentation.
In Halliburton Co. v. Erica P. John Fund, Inc. (“Halliburton II”), the Supreme Court considered a direct attack on Basic’s presumptions, and declined to do away with them. Judging by the volume of academic commentary to date, the most significant contribution of Halliburton II is a more pragmatic definition of market efficiency, which is the underlying mechanism that converts information about securities into their prices. To invoke the presumption of reliance in a fraud-on-the-market suit, plaintiffs no longer need to show that the market for a public company security is hyper-efficient, in that it fully and quickly impounds into stock prices all publicly available information, as some courts have required. Rather, the Court embraced the notion that market efficiency is a “matter of degree.”
In this Article, I propose that much of Halliburton II’s second holding—that a defendant can prevent class certification by showing no statistically significant movement in the price of the security at the time of corrective disclosure—does nothing to improve the quality of securities class-action litigation, and could make it worse. Financial misreporting by public companies distorts more than just the price of the firms’ securities, and that distortion other than that affecting the prices of public securities can in some circumstances be more significant and economically wasteful than stock price distortion. This Article develops an analytical matrix that identifies possible combinations of distortions in the stock price and economic dislocation to suggest when fraud-on-the-market litigation is likely to insufficiently deter disclosure fraud. Based on empirical studies, this Article identifies the circumstances in which large economic distortions caused by false disclosures are likely to be particularly large. In light of these observations, the Article suggests that fraud-on-the-market litigation should not be understood primarily as a remedy for victimized shareholders, who can often eliminate the cost of fraud ex ante, but as a quasi qui tam cause of action available to purchasers and sellers of (usually equity) securities to police economically-harmful false disclosures by public companies. Even in cases where buyers and sellers of stock are not the class most significantly harmed by disclosure fraud, they nearly always suffer some identifiable losses, thus avoiding difficult evidentiary questions about standing. When viewed through this lens, many of the objections to securities litigation become moot and its virtues are revealed.
This Article examines the intersection of fee-shifting bylaws and federal private securities fraud suits. Specifically, this Article hypothesizes about the effects fee-shifting bylaws would have, if enforceable, on private securities fraud litigation. It then turns to the validity of fee-shifting bylaws under federal law and concludes that they are invalid as applied to securities fraud claims. In light of this conclusion, this Article considers whether Congress should pass legislation to validate fee-shifting bylaws and determines that it should not.
One prominent justification for the mandatory disclosure rules that define modern securities law is that these rules encourage individual investors to participate in stock markets. Mandatory disclosure, the theory goes, gives individual investors access to information that puts them on a more equal playing field with sophisticated institutional shareholders. Although this reasoning has long been cited by regulators and commentators as a basis for mandating disclosure, recent work has questioned its validity. In particular, recent studies contend that individual investors are overwhelmed by the amount of information required to be disclosed under current law, and thus they cannot—and do not—use that information to analyze the companies that they own.
Using a recent change in the law that allows firms to disclose less information before their initial public offering (“IPO”), we examine whether reduced disclosure leads to less trading by individual investors. Our results show that, immediately following the IPO, individual investors are less likely to trade in the stocks of the firms that provide less disclosure—but that this difference disappears after two weeks of trading. Our findings have important implications for the lawmakers now examining whether, and how, to change the mandatory disclosure rules that have served as the basis of federal securities law for generations.
In ATP Tour, Inc. v. Deutscher Tennis Bund, the Delaware Supreme Court held that a private company’s fee-shifting bylaw was facially valid. And before that decision, Delaware courts similarly upheld companies’ use of forum-selection bylaws requiring that intra-corporate disputes be litigated in a single designated forum. Many interpreted these holdings as broad endoresements of bylaws that could regulate the litigation process itself and a move by the Delaware courts to curtail shareholder litigation. Indeed, the Delaware legislature itself responded to ATP, amending the state’s corporate law to explicitly prohibit Delaware companies from adopting fee-shifting bylaws for shareholder litigation. But the legislature simultaneously allowed Delaware companies to adopt forum-selection bylaws.
In this Article, we show that ATP and caselaw related to forum-selection bylaws will not result in calamity for investors or provide a silver bullet for companies to end shareholder and securities litigation. Rather, when carefully and fairly read, these decisions simply reaffirm the Delaware Way, under which corporate managers are vested with broad legal authority, but that authority is tempered by principles of equity. Using ATP and fee-shifting bylaws as a point of departure, we provide a template for equitable analysis of not only fee-shifting bylaws, but also forum-selection bylaws and other bylaws relating to litigation. Furthermore, as we argue in this Article, had equitable principles been properly applied to fee-shifting bylaws, equitable principles would have likely prevented fee-shifting bylaws from extinguishing meritorious shareholder or securities litigation anyway. In fact, the only kind of fee-shifting bylaw that would likely have survived equitable scrutiny is one that already exists under Delaware’s Rule 11—one that provides that a neutral arbiter can approve of two-way shifting of reasonable fees in response to frivolous litigation. Ultimately, perhaps the most compelling case for legislation barring fee-shifting bylaws in other states that follow the Delaware Way is that doing so may spare litigants and the system the lengthy, common-law process that will likely arrive at the state of the law already in place.
In ATP Tour, Inc. v. Deutscher Tennis Bund, the Delaware Supreme Court held that a private company’s fee-shifting bylaw was facially valid. And before that decision, Delaware courts similarly upheld companies’ use of forum-selection bylaws requiring that intra-corporate disputes be litigated in a single designated forum. Many interpreted these holdings as broad endoresements of bylaws that could regulate the litigation process itself and a move by the Delaware courts to curtail shareholder litigation. Indeed, the Delaware legislature itself responded to ATP, amending the state’s corporate law to explicitly prohibit Delaware companies from adopting fee-shifting bylaws for shareholder litigation. But the legislature simultaneously allowed Delaware companies to adopt forum-selection bylaws.
In this Article, we show that ATP and caselaw related to forum-selection bylaws will not result in calamity for investors or provide a silver bullet for companies to end shareholder and securities litigation. Rather, when carefully and fairly read, these decisions simply reaffirm the Delaware Way, under which corporate managers are vested with broad legal authority, but that authority is tempered by principles of equity. Using ATP and fee-shifting bylaws as a point of departure, we provide a template for equitable analysis of not only fee-shifting bylaws, but also forum-selection bylaws and other bylaws relating to litigation. Furthermore, as we argue in this Article, had equitable principles been properly applied to fee-shifting bylaws, equitable principles would have likely prevented fee-shifting bylaws from extinguishing meritorious shareholder or securities litigation anyway. In fact, the only kind of fee-shifting bylaw that would likely have survived equitable scrutiny is one that already exists under Delaware’s Rule 11—one that provides that a neutral arbiter can approve of two-way shifting of reasonable fees in response to frivolous litigation. Ultimately, perhaps the most compelling case for legislation barring fee-shifting bylaws in other states that follow the Delaware Way is that doing so may spare litigants and the system the lengthy, common-law process that will likely arrive at the state of the law already in place.
The Delaware legislature in 2015 amended the Delaware General Corporation Law to authorize forum-selection bylaws and to prohibit charter or bylaw provisions that would shift to the plaintiff defense costs incurred in connection with shareholder suits that were not successfully concluded. In so acting, the legislature gave managers something they wanted, a way to deal with the scourge of multi-forum litigation, while pacifying the local bar that feared lucrative shareholder suits would disappear because of the chilling effect of a loser-pays rule for shareholder suits.
The legislature acted after the Delaware Court of Chancery held in Boilermakers Local 154 Retirement Fund v. Chevron Corp. that the board could, without the concurrence of the shareholders, adopt bylaw provisions that permitted the corporation to choose the forum in which a shareholder-initiated suit would be maintained. Subsequently, in ATP Tour, Inc. v. Deutscher Tennis Bund, the Delaware Supreme Court upheld a board-adopted bylaw that abandoned the long-maintained American Rule (whereby litigants bear their own litigation costs) to instead assign the suit’s defendant’s expenses (which in a derivative suit would include the corporation’s costs) to the plaintiff if the suit proved unsuccessful.
Boilermakers and ATP Tour each reasoned from the perspective that the shareholders’ relationship with the corporation, and in turn their relationship with the board of directors, are contractual so that much of the shareholders’ rights can be understood to flow from certain organic documents, and most significantly and pervasively from the company’s bylaws. The Article develops two broad points: (1) that the shareholder’s relationship is more than just a contract, and, (2) even if the relationship were contractual, bedrock contract law does not support the results reached in Boilermakers and ATP Tour.
The recent financial crisis brought into sharp relief fundamental questions about the social function and purpose of the financial system, including its relation to the “real” economy. This Article argues that, to answer these questions, we must recapture a distinctively American view of the proper relations among state, financial market, and development. This programmatic vision—captured in what we call a “developmental finance state”—is based on three key propositions: (1) that economic and social development is not an “end-state” but a continuing national policy priority; (2) that the modalities of finance are the most potent means of fueling development; and (3) that the state, as the most potent financial actor, both must and often does pursue its developmental goals by acting endogenously—i.e., as a direct participant in private financial markets. In addition to articulating and elaborating the concept of the developmental finance state, this Article identifies and analyzes the principal modalities through which the modern American developmental finance state operates today. Finally, the Article proposes three broad strategic extensions of the existing modalities, with a view to enabling the emergence of a more ambitiously proactive and effective developmental finance state—and thus rediscovering a truly public-minded finance.
For the sixty-five million Americans with a criminal record, it is cruelly ironic that perhaps the most important resource for turning their lives around—employment—is also often the most elusive. Shut out from legitimate job opportunities, many ex-offenders resort to illegal means of survival that hasten their return to prison. Recidivism has devastating consequences not only for the individual offender, but also the family, the community, and society at large. This article proposes three amendments to Title VII of the Civil Rights Act of 1964 that seek to balance ex-offenders’ need for employment with employers’ safety concerns. First, employers should be prohibited from discriminating against an ex-offender whose criminal record is not directly related to the job in question or who does not pose an unreasonable threat to property or to the safety of others. Second, employer inquiries about an applicant’s criminal record should be delayed until after at least one job interview. Third, a negligent hiring provision should be added to Title VII that creates a rebuttable presumption against negligence and that caps damages in certain cases. These measures represent a sensible, middle-of-the-road approach that promotes the employment of ex-offenders in appropriate cases, while ensuring that neither employers nor the public are unduly burdened as a result.
The laws governing gun possession are changing rapidly. In the past two years, federal courts have wielded a revitalized Second Amendment to invalidate longstanding gun carrying restrictions in Chicago, the District of Columbia, and throughout California. Invoking similar Second Amendment themes, legislators across the country have steadily deregulated public gun carrying, preempting municipal gun control ordinances in cities like Philadelphia, Atlanta, and Cleveland.
These changes to substantive gun laws reverberate through the constitutional criminal procedure framework. By making it lawful for citizens to carry guns even in crowded urban areas, enhanced Second Amendment rights trigger Fourth Amendment protections that could radically transform American policing. Evidence of handgun possession—whether from a tip or observation—is increasingly an inadequate justification for a Fourth Amendment stop; officers will struggle to articulate legal grounds for temporarily disarming citizens during face-to-face encounters; and the promise of gun-detecting technology as an alternative to invasive investigative techniques, such as pretextual arrests and frisks, may be squelched. Whether observers view these implications as beneficial, disastrous, or something in between, one thing is clear: courts, policymakers, and academics must begin to address the dramatic Fourth Amendment implications of an expanding Second Amendment “right to remain armed.”
In this Article, we demonstrate that the stockholder’s appraisal remedy—long-dismissed in corporate law scholarship as useless or worse—is in the middle of a renaissance in public company mergers. We argue that this surge in appraisal activity promises to benefit public shareholders in circumstances where they are most vulnerable.
We first show a sea change in the use of appraisal in Delaware. Relying on our hand-collected data, we document sharp recent increases in the incidence of appraisal petitions, in the size of the petitioners’ holdings, and in the sophistication of the petitioners targeting public deals. These litigants appear to invest in target company stock after the announcement of the merger and with the intention of pursuing appraisal. In short, this is appraisal arbitrage. There is every reason to believe that appraisal now stands as the most potent legal challenge to opportunistic mergers.
We also present evidence showing that these appraisal petitions bear strong markers of litigation merit—they are, in other words, targeting the right deals. Nevertheless, defense lawyers have recently suggested that appraisal arbitrage constitutes some sort of “abuse” of the remedy and ought to be stopped. This nascent argument has matters precisely backwards.
This new world of appraisal should be welcomed and indeed encouraged. Our analysis reveals that appraisal arbitrage focuses private enforcement resources on the transactions that are most likely to deserve scrutiny, and the benefits of this kind of appraisal accrue to minority shareholders even when they do not themselves seek appraisal. In this way, the threat of appraisal helps to minimize agency costs in the takeover setting, thereby decreasing the ex ante cost of raising equity capital and improving allocative efficiency in public company mergers and acquisitions. We offer some modest reforms designed to enhance the operation of the appraisal remedy in Delaware.
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