The Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research recently released their analysis of securities class action filings in 2012. They report that 152 new securities class actions were filed last year, a 19 percent decline from the 188 new filings in 2011.

Of particular interest is the observation that only thirteen cases arising from merger and acquisition transactions were filed in federal courts in 2012, as compared to 43 in 2011 and 40 in 2010. “Evidence indicates,” the report states, that merger and acquisition litigation is “now being pursued almost exclusively in state courts after the unusual jump in federal M&A filings in 2010 and 2011.” Though such litigation typically arises under state law, plaintiffs often have the option to frame their claims as violations of the federal securities laws or bring them in federal court by invoking diversity jurisdiction.

…continue reading: Litigation of Investor Claims: State v. Federal Court

My recent article, Mutual Fund Sales Notice Fees: Are a Handful of States Unconstitutionally Exacting $200 Million Each Year?, forthcoming in the Hastings Constitutional Law Quarterly, describes the political compromise struck in 1996 between Congress and state securities regulators. That year, Congress enacted the National Securities Markets Improvement Act of 1996 (NSMIA), which effected multiple changes to the federal securities laws to promote efficiency and capital formation by eliminating overlapping federal and state securities regulations.

With respect to mutual funds, NSMIA resolved the problem of overlapping regulation by preempting state substantive regulation and registration requirements of mutual funds, thereby providing for exclusive federal jurisdiction over the contents of a mutual fund’s prospectus and operation of each fund. NSMIA was welcomed by the mutual fund industry because it eliminated the “crazy quilt” of regulation that had made registration of mutual fund shares unnecessarily cumbersome—in some cases leading mutual funds to restrict their fund offerings to residents of certain states.

However, in order to secure the acquiescence of the states and secure NSMIA’s enactment, NSMIA preserved state authority to require mutual funds to file sales reports and to pay state filing fees based on those sales in connection with the sales reports. A handful of states have taken unfair advantage of this fee loophole.

…continue reading: Mutual Fund Sales Notice Fees

Last month, the Columbia Business Law Review published “A Spatial Representation of Delaware-Washington Interaction in Corporate Lawmaking.” In this brief paper, I examine interaction between Delaware and Washington in corporate lawmaking, focusing on the shareholder access initiatives in each jurisdiction. The paper uses a straight-forward spatial model of the state-federal interaction, paralleling spatial models that political scientists have used to illustrate other instances of jurisdictional interaction.

In prior work I showed how Delaware corporate law can be, and often is, confined by, or influenced by, federal action. Sometimes Washington acts and preempts the field, constitutionally or functionally, leaving no space for state corporate law action. Sometimes Delaware tilts toward or follows Washington opinion, even if Washington opinion does not square perfectly with the state lawmakers’ own consensus view of the best way to proceed. I examined these channels in Delaware’s Competition, 117 Harvard Law Review 588 (2003), and Delaware’s Politics, 118 Harvard Law Review 2491 (2005).

…continue reading: A Spatial Representation of Delaware-Washington Interaction in Corporate Lawmaking

My article, Efficient Markets and the Law: A Predictable Past and an Uncertain Future (forthcoming in the Annual Review of Financial Economics (vol. 4, 2012)), analyzes the diverse situations in which the efficient-market hypothesis (EMH) has influenced — or has failed to influence — federal securities regulation and state corporate law, and the prospective roles for the EMH in both federal and state contexts. In federal securities regulation, the EMH has offered a theoretical construct to accompany the general belief in the value of accurate and complete information that has animated the US Securities and Exchange Commission (SEC) since its creation. Applications of the EMH have generally been straightforward and predictable: For instance, EMH concepts of the market processing of public information helped motivate the streamlining of procedural requirements as to corporate disclosures and, more controversially, as to Rule 10b-5-based securities class actions. In state corporate law, the EMH has helped shape thinking as to takeovers and the corporate objective.

However, the EMH and related learning have failed to properly inform governmental actions to address financial illiteracy. This is troubling as a social matter, especially in an era of increased individual responsibility for retirement well-being, inadequate savings, and highly uncertain financial times.

…continue reading: Efficient Markets and the Law: Predictable Past and Uncertain Future

Recently, in Global Reinsurance Corp.–U.S. Branch v. Equitas Ltd., the New York Court of Appeals, New York’s highest court, refused to apply the state’s antitrust statute, the Donnelly Act, to allegedly anticompetitive conduct in Great Britain that had only incidental effects in New York.  Reversing a divided decision of the intermediate appellate court, the Court of Appeals reasoned that state antitrust law could not have a broader extraterritorial reach than federal antitrust law; otherwise, statutory and judicial limitations on the federal Sherman Act “would be undone if states remained free to authorize ‘little Sherman Act’ claims that went beyond it.”

This rationale may have significant implications beyond the antitrust arena, as the Court of Appeals more broadly reaffirmed that “[t]he established presumption is, of course, against the extra-territorial operation of New York law.”  For example, the potential impact on securities claims under state common law is particularly notable.  In the wake of the United States Supreme Court’s decision in Morrison v. National Australia Bank, which held that Section 10(b) of the Securities Exchange Act applies only to domestic securities transactions (see our memo here), a number of plaintiffs have attempted to invoke state common law to recover losses on extraterritorial transactions.  One potential obstacle to such state-law suits appeared to have been removed late last year, when the Court of Appeals, in Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management, rejected a line of lower-court and federal precedents that had held common-law securities actions preempted by New York’s securities statute, the Martin Act (see our memo here).

…continue reading: Limits on Extraterritorial Reach of State Law

On October 9, 2011, California Governor Jerry Brown signed into law competing bills that create two new corporate forms in California — a “flexible purpose corporation” and a “benefit corporation” — intended to allow entrepreneurs and investors the choice of organizing companies that can pursue both economic and social objectives. The new corporate forms differ from traditional for-profit corporations that are organized to pursue profit (and not social purposes) and non-profit corporations that must be used solely to promote social benefits. These laws will take effect on January 1, 2012.

The flexible purpose corporation is created by California Senate Bill 201 (“SB 201″), which adds Division 1.5 to Title 1 of the California Corporations Code (the “Code”) and amends other related sections of the Code, and the benefit corporation is created by California Assembly Bill 361 (“AB 361″), which adds Part 13 to Division 3 of Title 1 of the Code. State Senator Mark DeSaulnier authored SB 201, and a full copy is available here. AB 361 was authored by Assemblyman Jared Huffman, and a full copy is available here. Both new laws take effect January 1, 2012.

…continue reading: Two New Corporate Forms to Advance Social Benefits in California

Recently, the United States Supreme Court affirmed a 2010 ruling of the Ninth Circuit Court of Appeals and held that a bankruptcy court, as a non-Article III court, did not have the constitutional authority to decide a state law claim brought by a debtor against a creditor, even though the matter was part of the “core” statutory jurisdiction of the bankruptcy court. This significant decision limits the power of bankruptcy courts and may have wide-ranging implications, requiring certain types of claims to be decided in a non-bankruptcy forum, even where they are central to a debtor’s bankruptcy case.

…continue reading: Supreme Court Limits the Power of Bankruptcy Courts to Hear Certain State Law Claims

The current multi-pronged effort for U.S. federal preemption of state corporate law, particularly in the area of corporate governance, is largely predicated on the view that it is necessary to forestall excessive risk-taking in the private sector. However, the federal preemption “cure” is a carrier of its own systemic disease. Before imposing this “cure,” it is essential to make a responsible assessment of its need and consequences.

State Regulation of Public Business Corporations: A Cornerstone of Capitalism

The modern U.S economic system — variously called capitalism, free enterprise or private enterprise — is centered around the publicly traded business corporation organized under state law. It is the principal vehicle for gathering non-government capital, investing it and managing the businesses in which it is invested. Historically, the governance of these companies has been regulated by their states of incorporation, with limited exceptions. And, in general, the state law-based corporate governance model has been very respectful — indeed protective — of the core concepts of the U.S. private enterprise system: freedom, capital raising, risk-taking, experimentation, innovation and value maximization. The model recognizes that publicly traded business corporations, as key enablers of the U.S. capitalist system, should be regulated in a manner which permits these core private enterprise concepts to operate with minimal interference.

…continue reading: The Risks to Private Enterprise from Federal Preemption of State Corporate Law

In my working paper Revisiting Corporate Governance Regulation: Firm Heterogeneity and the Market for Corporate Domicile, which I recently presented at the Law, Economics and Organizations Workshop here at Harvard Law School, I use a discrete choice framework to analyze state design and firm choice of the implications of incorporation: corporate governance laws, corporate taxes and court structure.

In order to exploit the information revealed in the preferences displayed by the different firms, a novel dataset with firm and incorporation characteristics is assembled and then a random coefficient discrete choice model is specified. In the model, incorporation is treated as a “product” that the states design, differentiated along all of the dimensions of the implications of incorporation, including the discrete “price”—the tax implications incorporation imposes on each firm. In every one year period, each heterogeneous firm chooses its preferred “product” by choosing to incorporate, to remain incorporated, or to reincorporate in one of the 51 US jurisdictions. Firms are decomposed into their ownership patterns, director characteristics, industry concentration, financial profiles, the geographical location of their headquarter states, and the residual unobservable dimensions of heterogeneity within them. The choice of incorporation state is seen to be made based on the preferences—resulting from these dimensions of firm heterogeneity—for the laws, court characteristics and taxes that makeup the incorporation implications.

I find that all incorporation implications, the laws, the court characteristics and the incorporation taxes matter. I find that firms are very responsive to incorporation and franchise taxes. In addition, on average, firms like antitakeover statues, but, consistent with an agency story, firms with an institutional shareholder block and venture capital backed firms dislike them. On average, firms dislike mandatory governance statutes restricting managerial power and facilitating the representation of minority shareholders, but these laws are not as restrictive for the choice of firms in concentrated industries. All firms dislike well functioning courts, consistent with a litigation deterrence motive. The recovered firm preferences are then taken to the simulation of recently proposed federal reforms aimed at centralizing the domicile implications and restricting firm choice. They are also related to the documented differential returns earned by firms with better internal governance in the 1990s, as well as to other trading strategies that would have yielded abnormal returns in the 2000s.

The full paper is available for download here.

On Friday, September 28, on the occasion of the Annual Francis G. Pileggi Distinguished Lecture in Law, sponsored by Widener University Law School’s Delaware Journal of Corporate Law, Harvard Law Professor Mark Roe presented his paper Does Delaware Compete?. The audience included leading Delaware lawyers and judges–both sitting and retired–eager to hear about the state of interstate corporate chartering competition. Yet, describing what he calls a “revisionist perspective,” Professor Roe argued that such competition no longer meaningfully exists: Delaware has won, and no other state is bothering to compete.

…continue reading: Does Delaware Compete?