The Sixth Commissioner

The federal securities laws grant broad rulemaking authority to the Securities and Exchange Commission (SEC). In promulgating rules, the SEC must not only ensure that its rules protect investors and the public interest, but also consider the effects of its rules on efficiency, competition, and capital formation (the ECCF mandate). However, the SEC\u27s rulemaking authority has been frustrated. In two decisions striking down SEC rules, the D.C. Circuit has required the SEC to conduct a quantitative cost-benefit analysis under the ECCF mandate. This contrasts with the SEC\u27s historic practice of qualitatively assessing the effects of its rules. While these D.C. Circuit decisions have been criticized for applying an inappropriately high standard of review to SEC rulemaking, this Article identifies a more fundamental problem with these decisions: they interfere with the SEC\u27s power to administer the securities laws. This interference frustrates administrative law principles that lie at the heart of the division of power among the three branches of government. Requiring the SEC to engage in a quantitative analysis in rulemaking is especially troubling in a context where the SEC must pass numerous rules under the Dodd-Frank and JOBS Acts. These analyses will surely fail to capture the unquantifiable effects of SEC rules, such as their effect on firm wealth-creating strategic management processes. For these reasons, this Article urges the SEC to exert its authority under securities laws and issue an explicit interpretation of the ECCF mandate in a way that best captures the full impact of its rules

Director Compliance with Elusive Fiduciary Duties in a Climate of Corporate Governance Reform

Corporate governance has become a hot topic following accounting scandals at Enron, WorldCom and others, which led to colossal corporate collapses. In many of those cases, the boards were \u27asleep at the wheel,\u27 failing to catch managements’ questionable accounting practices. The Sarbanes-Oxley Act of 2002 was the federal government’s attempt at fixing the holes in the corporate governance system exposed by the accounting scandals. Through a patchwork of disclosure requirements and conduct rules, Congress and the Securities and Exchange Commission have attempted to bring about an increase in board oversight of, and independence from, management. The stock exchanges have also jumped into the corporate governance arena, implementing new rules with similar objectives. This collective corporate governance reform has imposed a significant new layer of responsibilities and qualifications on directors of public companies. Yet shareholders’ only avenue to enforce the new duties under these reforms is through state law fiduciary duties. My article demonstrates how state courts have started to enforce the governance mandates under the reforms through fiduciary duties. Specifically, in my article I examine the watershed Disney case and the duty to act in good faith, and identify how Delaware courts are poised to use this duty to enforce directors’ oversight responsibilities under the corporate governance reforms. My article takes a uniquely holistic view of these shifts in Delaware jurisprudence, explaining how they allow Delaware courts to more closely align the standard of conduct expected from directors with the standard of review that courts apply in determining liability. My article ultimately submits that by more closely aligning these two standards through the duty to act in good faith, the Delaware courts are able to reflect evolving shareholder expectations in fiduciary duty law, thereby making directors more responsive to the shareholders who elected them

The Duty to Think Strategically

Under Delaware corporate law, directors and officers have a duty to oversee their firm\u27s management of risk to limit losses. Corporate law does not, however, require directors or officers to oversee their firm\u27s management of strategy to create gains. Yet, managing both risk and strategy is essential to a firm in creating value. In fact, as I argue in the Article, the current focus by courts and commentators only on risk management to prevent losses could actually undermine a firm\u27s management of its strategy for gains. I therefore propose a model for how Delaware corporate law can drive firms to manage their strategies for gains, in addition to their risk of loss, all to create value. This proposal is especially necessary in light of the fact that companies such as General Motors collapsed not because of excessive risk taking, but because they failed to sufficiently formulate and implement innovative strategies for gains. This proposal also opens an additional avenue to combat the significant problem of short-termism, or the drive by firms to create short-term profits regardless of whether that creates true value. It combats short-termism by creating an expectation for officers and directors to oversee their firm\u27s formulation and implementation of value-creating strategic objectives. Those objectives, rather than next quarter\u27s earnings targets, would then be expected to guide firm decisions

The Best and Worst of Contracts Decisions: An Anthology

Five hundred years ago, the common law of contract was without substance. It was form-procedure. Plaintiffs picked a form of action, and common law judges made sure someone besides themselves answered all the hard questions; the parties, a jury, or a ritual determined the winner and the remedy. Judges ran a switch on a conflicts-resolution railway. Thomas More, when Chancellor of England (1529-33), urged judges to lay tracks and control the trains. The problem, he said, was that the judges, by the verdict of the jury[,] cast off all quarrels from themselves. The judges soon assumed greater authority, taking responsibility for the law\u27s substance. The consideration requirement was in place by 1539, and judges afterwards imposed doctrine upon doctrine. Over centuries, they created the common law of contract. That law is now mature, more or less, meaning that judges have tools to fix what they want to fix, and feel free to do so. The law they created-the common law of contract-is a remarkable intellectual and political achievement

What is the NBA?

The National Basketball Association\u27s (NBA) organizational structure is curious. While courts at times refer to the NBA as a joint venture, and at other times as a single entity, their analyses are conducted not for state organization law purposes, but to assess the NBA’s compliance with federal antitrust law. Commentators, too, consistently address the NBA’s organizational structure only under antitrust law and not state organization law. As I argue, given the different purposes of these two legal regimes—antitrust law to protect consumers through preserving competition, and state organization law to ensure managers are faithful to the business purpose and to create a default structure among owners and managers—conclusions about the NBA’s organizational structure for purposes of compliance with antitrust law do not control the analysis of the NBA’s structure for purposes of state organization law. To fill the gap in case law and commentary, this article analyzes the NBA’s organizational form under state organization law. This analysis is important because the NBA’s organizational form impacts the rights and duties of the member team-owners of the NBA. If, for example, the NBA is a joint venture partnership under state organization law—that is, an association of team owners who have come together to pursue a limited scope business for profit—then, by default, its members would owe fiduciary duties to the other members and any member could seek judicial expulsion of a recalcitrant member

The Sixth Commissioner

The federal securities laws grant broad rulemaking authority to the Securities and Exchange Commission (SEC). In promulgating rules, the SEC must not only ensure that its rules protect investors and the public interest, but also consider the effects of its rules on efficiency, competition, and capital formation (the ECCF mandate). However, the SEC\u27s rulemaking authority has been frustrated. In two decisions striking down SEC rules, the D.C. Circuit has required the SEC to conduct a quantitative cost-benefit analysis under the ECCF mandate. This contrasts with the SEC\u27s historic practice of qualitatively assessing the effects of its rules. While these D.C. Circuit decisions have been criticized for applying an inappropriately high standard of review to SEC rulemaking, this Article identifies a more fundamental problem with these decisions: they interfere with the SEC\u27s power to administer the securities laws. This interference frustrates administrative law principles that lie at the heart of the division of power among the three branches of government. Requiring the SEC to engage in a quantitative analysis in rulemaking is especially troubling in a context where the SEC must pass numerous rules under the Dodd-Frank and JOBS Acts. These analyses will surely fail to capture the unquantifiable effects of SEC rules, such as their effect on firm wealth-creating strategic management processes. For these reasons, this Article urges the SEC to exert its authority under securities laws and issue an explicit interpretation of the ECCF mandate in a way that best captures the full impact of its rules

Turning a Short-Term Fling into a Long-Term Commitment: Board Duties in a New Era

Corporate boards face significant pressure to make decisions that maximize profits in the short run. That pressure comes in part from executives who are financially rewarded for short-term profits despite the long-term risks associated with those profit-making activities. The current financial crisis, where executives at AIG and numerous other institutions ignored the long-term risks associated with their mortgage-backed securities investments, arose largely because those executives were compensated for the short-term profits generated by those investments despite their longer-term risks. Pressure on boards for short-term profits also comes from activist investors who seek to make quick money off of trading in stocks whose prices overly reflect short-term firm values. Yet this excessive focus on producing short-term profits runs counter to the interests of non-short-termist investors, other corporate constituents, as well as our economy and society as a whole in creating corporate enterprises that are profitable on an enduring basis. Once again, the current financial crisis provides a lens through which we can see the distressing impact – both to individual businesses as well as to the entire U.S community - of an excessive focus on short-term profits. I propose a solution to address this problem of short-termism. Under my proposal, directors would be required to make decisions that are in the long-term best interest of stockholders and the corporation under their fiduciary duties. I explain in the article why I propose fixing the short-termism problem through fiduciary duties as well as how, practically, my proposal would be implemented

Out of the Shadows: Requiring Strategic Management Disclosure

One of the central goals of federal securities laws is to protect investors by ensuring that they receive a steady flow of timely, complete, and accurate information. However, that goal is partially undermined by the SEC’s failure to require public companies to disclose anything about their strategic management processes despite increasing requirements on the disclosure of associated risk management processes. Like risk management processes, strategic management processes are designed to create firm value. But instead of focusing on loss-creating risks, strategic management focuses on wealth-creating opportunities. As a result, investors are given a lopsided — rather than a complete or accurate — picture of firm processes to create value. To address this concern, I propose that the SEC require public firms to disclose those qualities of their strategic management processes equivalent to what they disclose about their risk management processes. I also propose that firms disclose how those two processes relate to one another. This new disclosure would give investors a more balanced picture of firm processes to create value. It would also reinforce the reality that the path to long-term success for a firm lays not merely with managing its risks, but also with formulating and implementing an effective strategy for growth — a process that unfortunately may suffer from neglect amidst the box-checking exercise that flows from compliance with scores of risk-based regulations