Equity Derivatives and the Challenge for Berle’s Conception of Corporate Accountability

With the proliferation of equity derivatives and related structured financial products, the North American conception of corporate governance faces a new and distinct challenge to its underlying premises.This Article analyzes these developments with a focus on the implications for director and officer accountability and corporate sustainability, using the occasion of the third symposium of the Adolf A. Berle, Jr. Center on Corporations, Law & Society to consider whether Berle’s analysis of corporate accountability offers any insights into how to address the uncoupling of economic interest and legal rights in corporate governance. Part II of this Article sets the context for the discussion, distinguishing the model of corporate governance prevalent in the United States from models applied elsewhere. It also briefly discusses why Berle’s shareholder-accountability model resonated with governance challenges at the time Berle wrote. Part III examines how the introduction of equity swaps and similarly structured financial products has, in a number of instances, uncoupled legal rights and economic interests, fundamentally challenging some of the underlying rationales for the shareholder- primacy model. Part IV discusses director and officer accountability in jurisdictions where equity swaps have become prevalent, and Part V considers directors hedging their own risk through derivatives activities. Part VI briefly examines why some of the current regulatory initiatives do not address the accountability concerns raised by derivativesactivities, and Part VII provides some initial thoughts as to how Berle’s original reasoning might be adapted to a more nuanced model of corporate governance and accountability. Part VIII concludes by noting that Berle’s analysis that the exercise of corporate power is subject to the equitable limitation that it cannot harm the interests of equity holders can potentially be applied to a broader set of stakeholders, and that the good faith conduct of directors and officers may play a role in determining what economic interest is actually at risk

The Disjunction Between Prevention and Compensation of Hip Fractures Among Elderly Citizens: The Law\u27s Role in Creating Ex Ante Incentives

This article examines the relationship between the compensation for and the prevention of hip fractures among the growing population of seniors in Canada. Sarra postulates that the current system expends funds on liability protection that would be better spent on prevention. Options explored are no-fault compensation, redirecting legal resources, negotiated risk, and adjust[ing] the tax base to ensure that there are sufficient resources to support elderly individuals

Equity Derivatives and the Challenge for Berle’s Conception of Corporate Accountability

With the proliferation of equity derivatives and related structured financial products, the North American conception of corporate governance faces a new and distinct challenge to its underlying premises.This Article analyzes these developments with a focus on the implications for director and officer accountability and corporate sustainability, using the occasion of the third symposium of the Adolf A. Berle, Jr. Center on Corporations, Law & Society to consider whether Berle’s analysis of corporate accountability offers any insights into how to address the uncoupling of economic interest and legal rights in corporate governance. Part II of this Article sets the context for the discussion, distinguishing the model of corporate governance prevalent in the United States from models applied elsewhere. It also briefly discusses why Berle’s shareholder-accountability model resonated with governance challenges at the time Berle wrote. Part III examines how the introduction of equity swaps and similarly structured financial products has, in a number of instances, uncoupled legal rights and economic interests, fundamentally challenging some of the underlying rationales for the shareholder- primacy model. Part IV discusses director and officer accountability in jurisdictions where equity swaps have become prevalent, and Part V considers directors hedging their own risk through derivatives activities. Part VI briefly examines why some of the current regulatory initiatives do not address the accountability concerns raised by derivativesactivities, and Part VII provides some initial thoughts as to how Berle’s original reasoning might be adapted to a more nuanced model of corporate governance and accountability. Part VIII concludes by noting that Berle’s analysis that the exercise of corporate power is subject to the equitable limitation that it cannot harm the interests of equity holders can potentially be applied to a broader set of stakeholders, and that the good faith conduct of directors and officers may play a role in determining what economic interest is actually at risk

Debtor in Possession Financing: The Jursidiction Of Canadian Courts to Grant Superpriority Financing in CCAA Applications

Restructuring of insolvent corporations can be an effective means of a voiding the social and economic consequences of firm failure. Key to successful restructuring is financing (called DIP financing) in the interim period during which the corporation is attempting to develop a viable business plan that is acceptable to stakeholders. Canadian courts have exercised their inherent jurisdiction to grantsuch financing. A recent case before the Supreme Court of Canada settled. However, there continue to be challenges to the courts\u27jurisdiction. This article suggests that the degree of uncertainty created by the courts\u27 granting of DIP financing has been exaggerated and that the courts have engaged in a reasoned effort to further the aims of the CCAA in protecting the interests of all creditors and the public in the continued operation of corporations where the prospects of successful reorganization exist

At What Cost? Access to Consumer Credit in a Post-Financial Crisis Canada

Access to consumer credit is influenced by many factors, such as amount and security of the consumer’s income, and credit card company and financial institution practices. Access is also driven by social, cultural and cognitive factors, including consumer understanding of the cost of credit; perceptions regarding ability to repay; cognitive influences regarding immediate consumption and delayed payment; understanding of the benefits and risks of debt to economic security; and the conflicts of interest inherent in the business of lending. Overall, bank and credit union credit has tightened since the global financial crisis. However, the study found that for many Canadians, the issue is less whether there is access to credit, but rather, “access to credit at what high cost and on what terms and conditions”. Much of the reported need for credit in the past two years has been the need to bridge income loss from job loss, reduced hours of employment and small business failures. Many individuals that could not access personal loans from their bank or credit union turned to alternate, more expensive, forms of credit, such as merchandise finance company loans, increasing credit card debt, skipping monthly payments on loans, and payday loans. Consolidation loans have been increasingly viewed as a debt management strategy, yet there are problems associated with consolidation. One issue identified was the growth in home equity lines of credit, originally intended to bridge financing for emergencies or a significant purchase, but now being used more akin to account withdrawing, portending future issues in respect to debt load and longer term economic security. Consumers face the direct costs of high interest rate charges and loan and broker fees. There is evidence to suggest that costs increase when consumer borrowers do not understand how interest rates and terms work, and thus consumer debtors may be paying considerably more for their credit than they need to. The lack of financial literacy is a major concern in that many consumer debtors do not fully appreciate the costs of carrying expensive credit, identified as particularly an issue among younger adults and recent immigrants to Canada. Yet to date, financial literacy training does not align with consumer debtors’ particular needs for financing based on income and a range of other factors. There are also significant indirect costs to the consumer of access only to expensive credit, such as foregone basic necessities because of excessive debt load, health outcomes and costs associated with the stress of over-indebtedness, and the costs to society, borne by creditors or the general tax base, when consumers default on loans or file for insolvency or bankruptcy. Analysis of the causes of insolvency for a cohort of 4,000 consumer insolvency cases from 2008 to 2010 indicates that “access to credit” forms an extremely small percentage of declared reasons for filing bankruptcy or proposals under the BIA. Related causes are much higher. For bankruptcies, insufficient income accounted for 30.5% of insolvency, unemployment for 18.8%, and over-indebtedness for 12.4%. For proposals, insufficient income accounted for 40.7% of insolvency, unemployment for 15.8%, and over-indebtedness for 13.8%. Seeking relief under Canadian insolvency law is reported by bankrupts as less associated with access to credit and more an outcome of consumer debtors’ inability to meet the payment demands of expensive credit they previously accessed. Credit card debt is a significant issue for consumer debtors. The average credit card debt was $21,620 and the median debt was$13,979. The data show that 90% of all debtors filing for insolvency relief had credit card debt. Equally, however, mortgage debt, personal loans and finance company debt are significant factors in filing, evidence of credit behaviour that catches consumer debtors in a repeated pattern of refinancing expensive debt and re-incurring it, which can expedite financial distress. Considerably more research and policy development is required to make consumer access to credit more understandable, affordable and accessible on a fair and reasonable basis. While financial literacy is an important goal, there is also an urgent need for the federal government to complement its current work in financial literacy with a much more comprehensive program regarding consumer credit