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Volume 8, Issue 2 (2019)

The fifteenth issue of the Michigan Business & Entrepreneurial Law Review has been published! Our subscribers will find the following works inside.

8 Mich. Bus. & Entrepreneurial L. Rev. ___ (2019)

Published: Summer 2019


Steven J. Cleveland: Unintentional Irony in Landmark Decisions of the Delaware Supreme Court Regarding Corporate Law

Abstract: Three landmark decisions of the Delaware Supreme Court exhibit unintentional irony: Beam v. Stewart, Smith v. Van Gorkom, and Paramount Communications Inc. v. Time Inc. In Beam, the court concluded that, regarding the decision of whether to seek remedy against Martha Stewart, her fellow directors would not have jeopardized their reputations for the minimal gain of continuing their business and personal relationships with her. Ironically, the court failed to acknowledge that Martha Stewart—in trading on material nonpublic information, which gave rise to the corporate claim against her—jeopardized her reputation (ultimately losing hundreds of millions of dollars and her freedom) for minimal gain (less than $50,000). Having failed to acknowledge that internal inconsistency and unintentional irony, the court offered no explanation why some directors would jeopardize their reputations for minimal gain, but others would not do so. Part I attempts to fill the void and suggests that Stewart suffered from cognitive biases, which would not have affected her fellow directors.

In Van Gorkom, the court famously concluded that the plaintiff carried his burden of proving that the board was grossly negligent in informing itself when selling the corporation, although, during a multi-month period, no bidder stepped forward with a superior proposal. The irony of the court’s conclusion is virtually self-evident. Part II further discusses subsequent precedent, which suggests that, viewed in retrospect, the board could have carried its burden that it reasonably informed itself, turning the conclusion of Van Gorkom on its head, and furthering the irony.

In Time, the court held that Time’s board did not preclude Paramount from hostilely acquiring Time when it affected an acquisition of Warner. According to the consensus, Time’s board in fact precluded Paramount, so the Time court could not have meant what it wrote. As described in Part III, examining for the presence of preclusive action sometimes may enlighten the ultimate inquiry of reasonableness, but other times, an examination into preclusion proves misleading. In dicta, the Delaware Supreme Court has acknowledged that preclusive conduct may be reasonable. As the inquiry into preclusion has yielded misleading, if not ironic, results, and as the Delaware Supreme Court has indicated that preclusive action may be reasonable, the court should re-examine the utility of the preclusion inquiry as an outcome-determinative filtering device regarding the ultimate inquiry of reasonableness.

In these foundational decisions of corporate law, the Delaware Supreme Court could not have meant what it wrote. Each section incorporates clarifying concepts for consideration, and Part IV briefly concludes.

Chiara Mosca: Should Shareholders Be Rewarded for Loyalty? European Experiments on the Wedge Between Tenured Voting and Takeover Law

Abstract: Corporate law reveals its democratic background when it comes to the general meetings of shareholders, finding, on both sides of the Atlantic, its most tangible expression in the “one share, one vote” principle. While, in the political landscape, the “one person, one vote” standard is absolute dogma and weighting votes according to people’s preferences and interests has never proved feasible, in the corporate scenario the one share, one vote principle is constantly challenged by the incentives of companies and their shareholders to shape corporate rights according to specific needs. In this respect, some legislators (specifically in France and Italy) have provided mechanisms that allow more loyal shareholders to increase their voting power. Tenured voting (or time-phased voting rights) should be analyzed in light of the modern corporate governance debate, which calls for a stronger role for long-term investors. However, the other side of the coin should be considered: the increase in voting rights broadens the range of control-enhancing mechanisms, although specific sunset clauses (whether provided for by law or voluntarily opted in by companies) may restore the one share, one vote rule. The analysis suggests that the mechanism based on tenured voting is more transparent and potentially less stable than other common control-enhancing mechanisms and deserves to be considered in the debate. At the EU level, the possibility left to the Member States of weighting shareholders’ voting power according to their long-term interests, leads to legislative fragmentation across Europe. Specifically, in Italy, the adoption of tenured voting coupled with a tradition of ownership concentration sharply empowers controlling shareholders. At the same time, European takeover regulation plays an exogenous role in indirectly selecting the companies that adopt time-phased voting rights. The final result is completely mistrusted, as tenured voting rights disappoint their expectations and are rarely used to meet a true need of long termism. The paper describes the paradox that emerges when tenured voting rights interact with the core principles of the EU financial market law system, and it offers various ways to alleviate this difficult coexistence.

Michael S. Diamant, Christopher W.H. Sullivan, & Jason H. Smith: FCPA Enforcement Against U.S. and Non-U.S. Companies

Abstract: This Article explores how U.S. authorities have enforced the FCPA against non-U.S. companies and tests the perception that the FCPA disproportionately impacts U.S. businesses. After briefly discussing the FCPA, its enforcement, and its reach, this Article examines corporate FCPA enforcement activity since the statute’s enactment in 1977. It finds that foreign firms have actually fared worse under the FCPA despite the fact that DOJ and the SEC have brought more enforcement actions against domestic companies in absolute terms. The average cost of resolving an FCPA enforcement action to non-U.S. corporations of resolving an FCPA enforcement action has been more than four times higher than it has been for domestic corporations: $72.3 million to $17.6 million. In recent years, the difference has been even more pronounced—in 2017, the averages were $150.3 million and $16.1 million, respectively. This Article also explores other ways in which FCPA enforcement has more dramatically affected foreign companies. For instance, U.S. enforcement authorities have more frequently required post-resolution obligations for foreign corporations. Between 2004 and 2018, nearly 60 percent of foreign companies involved in FCPA enforcement actions were subject to post-resolution obligations in the form of an independent compliance monitor, self-reporting, or a combination of the two, compared to only 54 percent of domestic companies. Finally, this Article offers some theories to explain these data.


Gautam Sundaresh: In Whose Interests Should a Company be Run? Fiduciary Duties of Directors During Corporate Failure in India: Looking to the West for Answers

Abstract: This Comment looks at the debate as it has played out in the legal jurisprudence of the U.S. and the U.K. The analysis of each considers the three financial stages of a corporation’s existence that are specifically addressed in the debate today, i.e.: (i) solvency; (ii) insolvency; and (iii) the zone of insolvency. After setting out the current position, this Comment specifically addresses the various shortcomings and criticisms of the models adopted by each jurisdiction and offers observations on the status quo and the implementation of these models. On this basis, this Comment goes on to propose a model to be adopted by India, the Indian legal jurisprudence in this respect still being in its evolutionary stages and lacking the depth and the level of analysis found in the West.


B. Graves Lee, Jr.: Crafting a Corporate Analogue to Criminal Disenfranchisement

Abstract: The Supreme Court’s 2010 decision in Citizens United v. FEC represented a sea change in the world of corporate citizenship. Although the decision dealt with campaign finance law, it has sparked significant discussion of the concept of corporate personhood more broadly. Corporations have increasingly taken advantage of legal rights previously reserved for individuals. This Note argues that where corporations reap the benefits of constitutional entitlements intended for individuals, they should suffer consequences for malfeasance similar to those imposed on individuals who engage in criminal conduct. Specifically, this Note advocates for limitations on corporate electioneering as a collateral consequence of a corporation’s criminal conviction, just as individuals may forfeit the right to vote following a felony conviction. Such a reform would address common criticisms regarding corporate criminal prosecutions’ lack of deterrent effect. It would also send an important expressive message that corporations do not enjoy more favorable treatment than individuals when facing criminal prosecutions.

Sari Rosenfeld: The Ever-Changing Scope of Insider Trading Liability for Tippees in the Second Circuit

Abstract: Liability under insider trading law continues to change as federal courts attempt to find new ways to hold insiders liable under the law. As recently as two years ago, the Second Circuit—in analyzing past decisions regarding tipper-tippee insider trading violations—blurred the distinction between legal and illegal insider trading when it fundamentally altered the idea of “personal benefit.” These various decisions provide the basis for antifraud provisions of securities law applying to insider trading, the consequences of which can be detrimental. This Note will discuss the standard that the Second Circuit uses to hold tippees liable for insider trading violations under the Exchange Act Rule 10b-5. It will begin by exploring a line of cases that lead up to the Second Circuit’s decision to alter the personal benefit test, which shifted more responsibility than ever onto the tipper’s state of mind. This Note will analyze that test and discuss the implications and problems that come with it. These include a greater likelihood that tippees will engage in deceptive behavior to extract material, non-public information from tippers. They also increase the potential that more parties caught in the middle of these situations will receive hefty prison sentences. Following that analysis, this Note will suggest an alternative approach—qualifying the personal benefit test to make it depend on more objective factors than it currently does. It will then discuss the court’s decision to amend and supersede its initial holding and replace it with a test which did not have a substantive impact on the outcome. It will ultimately conclude that the same test should apply.

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