Triumphs of Commission

Willis L.M. Reese Prize commencement address to the Columbia Law School class of 2017

The Berkeley Transactional Practice Project Competencies/Skills Survey

This set of slides, presented by UC Berkeley Professor Eric Talley to the California State Bar Task Force on Admissions Regulation Reform, summarizes the findings of a survey of transaction-focused attorneys and faculty regarding necessary skills and competencies. The survey documents several areas that are highly valued by transaction-oriented attorneys, but which tend not to be the focus of many proposed competencies-based reforms that focus more exclusively on litigation oriented areas

Contract Renegotiation, Mechanism Design, and the Liquidated Damages Rule

The common law practice of refusing to enforce contractual penalties has long mystified law and economics scholars. After critiquing the prevailing law and economics analyses of the common law rule, Eric L. Talley reevaluates the penalty doctrine using the game theoretic technique of mechanism design, which facilitates the analysis of multiparty bargaining situations under various assumptions. Using this technique to model the allocational consequences of various enforcement regimes that courts might adopt with respect to stipulated damages clauses, Mr. Talley finds that penalty nonenforcement can increase economic efficiency by discouraging strategic behavior by the parties, thereby inducing more efficient contract renegotiation

Cataclysmic Liability Risk Among Big Four Auditors

Since Arthur Andersen\u27s implosion in 2002, policymakers have been encouraged with ever increasing urgency to insulate the auditing industry from legal liability. Advocates of such insulation cite many arguments, but the gravamen of their case is that the profession faces such significant risk of cataclysmic liability that its long term viability is imperiled. In this Essay, I explore the nature of these claims as a legal, theoretical, and empirical matter. Legally, it is clear that authority exists (within both state and federal law) to impose liability on auditing firms for financial fraud, and courts have been doing so sporadically for years. Theoretically, it is certainly conceivable that, under certain conditions, cataclysmic liability risk could lead to widespread industry breakdown, excessive centralization, and the absence of third-party insurance. Whether such conditions exist empirically, however, is a somewhat more opaque question. On one hand, the pattern of liability exposure during the last decade does not appear to be the type that would, at least on first blush, imperil the entire profession. On the other hand, if one predicts historical liability exposure patterns into the future, the risk of another firm exiting due to liability concerns appears to be more than trivial. Whether this risk is large enough to justify liability limitations or other significant legal reforms, however, turns on a number of factors that have thus far gone unexamined by either advocates or opponents, including the presence of market mechanisms of deterrence, the effectiveness of current regulation, the likely welfare effects of further contraction of the industry, and the likelihood of new entry after a contraction

Corporate Inversions and the Unbundling of Regulatory Competition

Several prominent public corporations have recently embraced a noteworthy (and newsworthy) type of transaction known as a tax inversion. In a typical inversion, a U.S. multinational corporation ( MNC ) merges with a foreign company. The entity that ultimately emerges from this transactional cocoon is invariably incorporated abroad, yet typically remains listed in U.S. securities markets under the erstwhile domestic issuer\u27s name. When structured to satisfy applicable tax requirements, corporate inversions permit domestic MNCs eventually to replace U.S. with foreign tax treatment of their extraterritorial earnings – ostensibly at far lower effective rates. Most regulators and politicians have reacted to the inversion invasion with alarm and indignation, no doubt fearing the trend is but a harbinger of an immense offshore exodus by U.S. multinationals. This reaction, in turn, has catalyzed myriad calls for tax reform from a variety of quarters, ranging from the targeted tightening of tax eligibility criteria, to moving the United States to a territorial tax system, to declaring (yet another) tax holiday for corporate repatriations, to reducing significantly (if not entirely) American corporate tax rates. Like many debates in tax policy, there remains little consensus about what to do (or whether to do anything at all). This Article analyzes the current inversion wave (and reactions to it) from both practical and theoretical perspectives. From a practical vantage point, I will argue that while the inversion invasion is certainly a cause for concern, aspiring inverters already face several constraints that may decelerate the trend naturally, without significant regulatory intervention. For example, inversions are but one of several alternative tax avoidance strategies available to MNCs – strategies whose relative merits differ widely by firm and by industry. Inversions, moreover, are invariably dilutive and usually taxable to the inverter\u27s U.S. shareholders, auguring potential resistance to the deals. They virtually require strategic (as opposed to financial) mergers between comparably sized companies, making for increasingly slim pickings when searching for a dancing partner, and a danger of overpaying simply to meet the comparable size requirements. They involve regulatory risk from competition authorities, foreign-direct-investment boards and takeover panels (not to mention from tax regulators themselves). They frequently provide only partial relief from extraterritorial application of U.S. taxes, especially for well-established U.S. multinationals. And finally, tax inversions can introduce material downstream legal risk, since they move the locus of corporate internal affairs out of conventional jurisprudential terrain and into the domain of a foreign jurisdiction whose law is – by comparison – recondite and unfamiliar

\u3ci\u3eLeft, Right, and Center\u3c/i\u3e: Strategic Information Acquisition and Diversity in Judicial Panels

This paper develops and analyzes a hierarchical model of judicial review in multimember appellate courts. In our model, judicial panels acquire information endogenously, through the efforts of individual panelists, acting strategically. The resulting equilibria strongly resemble the empirical phenomena collectively known as panel effects – and in particular the observed regularity with which ideological diversity on a panel predicts greater moderation in voting behavior (even after controlling for the median voter\u27s preferences). In our model, non-pivotal panel members with ideologies far from the median have the greatest incentive to acquire additional policy-relevant information where no one on a unified panel would be willing to do so. The resulting information structure pushes deliberation and observed voting patterns towards apparent moderation. We illustrate the plausibility of our model by calibrating it to empirical data, and explore various normative implications of our theory

Don\u27t Go Chasing Waterfalls: Fiduciary Duties in Venture Capital Backed Startups

Venture-capital-backed startups are often crucibles of conflict between common and preferred shareholders, particularly around exit decisions. Such conflicts are so common, in fact, that they have catalyzed an emergent judicial precedent – the Trados doctrine – that requires boards to prioritize common shareholders\u27 interest and to treat preferred shareholders as contractual claimants. We evaluate the Trados doctrine using a model of startup governance that interacts capital structure, corporate governance, and liability rules. The nature and degree of inter-shareholder conflict turns not only on the relative rights and options of equity participants, but also on a firm\u27s intrinsic value as well as its value to potential third-party bidders. Certain combinations of these factors can cause both common and preferred shareholders\u27 incentives to stray from value maximization. We show that efficient decisions can be induced by an anti-Trados rule that emphasizes preferred shareholders\u27 interests and treats common shareholders as contractual claimants. The Trados doctrine, by contrast, cannot categorically reconcile private interests with value maximization. More generally, our model offers a precise mechanism through which corporate governance and capital structure jointly determine firm valu

Short-Termism and Long-Termism

A significant debate in corporate law and finance concerns the role of activist investors (especially hedge funds) in corporate governance. Activists, it is often alleged, imprudently privilege short term earnings over superior (but less liquid) long term investments. Activists counter that they target managers who unjustifiably cling to questionable strategies. While this debate is hardly new, it has grown increasingly fractious of late. We analyze the activism debate within a theoretical securities-market setting. In our framework – which draws from an emerging literature in empirical and experimental finance – managers are differentially overconfident (causing them to favor long-term projects), while investors are differentially present-biased (causing them to favor short-term liquidity). We allow these biases to be either fundamental or induced by institutional factors, and they can occur either in isolation or in conjunction. Equilibrium behavior bears an uncanny resemblance to the ongoing activism debate, providing a new perspective on well-worn battle lines. Prescriptively, we demonstrate that short-termism and long-termism can have symbiotic attributes. Consequently, an optimal corporate law and governance regime should account for both effects, as well their possible interaction

Experimental Law and Economics

This chapter provides a framework for assessing the contributions of experiments in Law and Economics. We identify criteria for determining the validity of an experiment and find that these criteria depend upon both the purpose of the experiment and the theory of behavior implicated by the experiment. While all experiments must satisfy the standard experimental desiderata of control, falsifiability of theory, internal consistency, external consistency and replicability, the question of whether an experiment also must be contextually attentive - in the sense of matching the real world choice being studied - depends on the underlying theory of decision-making being tested or implicated by the experiment. We find that the importance of contextual attentiveness depends on whether the experiment tests or implicates a nitary-process theory of decision-making or a multiple-process theory. Unitary-process theories posit that people employ a single operational approach to make decisions across a broad (or universal) domain of activity. Rational Choice Theory is a unitary-process theory. Because unitary-process theories posit that people employ the same decision-making program in all contexts, experimenters can falsify a unitary-process theory using an experimental choice which bears little resemblance to any real-world choice. Faith in a unitary process account also permits legal policymakers to draw broad normative implications from experiments involving quite artificial choices. By contrast, multiple-process theories hold that people employ multiple decision-making programs when they make choices. Moreover, the relative impact of these programs can depend on the context of the decision. This posited interaction between context and decision-making implies that experimentalists seeking to examine legal decision-making must be sensitive to contextual factors likely to affect deliberative and non-conscious programs in the real world. In addition, policymakers must proceed cautiously before using experimental evidence to draw normative policy conclusions because experimental results may not be robust across contexts