Intraportfolio Litigation Essay

The modern trend is for investors to diversify. Shareholders who own one S&P 500 firm tend to own many of the others as well. This trend casts doubt on the traditional compensation and deterrence rationales for legal rules that hold corporations liable for the acts of their agents. Today, when A Corp sues B Corp (for breach of contract, theft of trade secrets, or any other legal wrong), many of the same shareholders own both the plaintiff and the defendant. For these shareholders, damages just shift money from one pocket to another, minus of course lawyer fees. We offer here a new rationale for corporate liability in such cases of “intraportfolio litigation.” Although corporae managers are typically rewarded for maximizing firm profits, what shareholders really care about is overall portfolio value. Firm-on-firm lawsuits can reduce principal-agent conflict by assigning intraportfolio costs to the managers responsible for them. Firm-specific financial data thus become a better tool for diversified shareholders to use in motivating and evaluating managers. Not all intraportfolio litigation can be justified on informational grounds, however. For example, securities fraud class actions against corporations lack informational value because the damages awards overstate the intraportfolio harm. Our theory thus provides lawmakers with a framework for distinguishing between value-creating and value-destroying lawsuits among diversified shareholders

Phase Transitions Driven by QuasiParticle Interactions

Quasiparticles and collective effects may have seemed exotic when first proposed in the 1930s, but their status has blossomed with their confirmation by todays sophisticated experiment techniques. Evidence has accumulated about the interactions of, say, magnons and rotons and with each other and also other quasiparticles. We briefly review the conjectures of their existence necessary to provide quantitative agreement with experiment which in the early period was their only reason for being. Phase transitions in the Anderson model, the Kondo effect, roton roton interactions, and highly correlated systems such as helium4, the Quantum Hall Effect, and BEC condensates are discussed. Some insulator and superconductor theories seem to suggest collective interactions of several quasiparticles may be necessary to explain the behavior. We conclude with brief discussions of the possibility of using the parameter to detect quantum critical points and some background on bound states emerging from the continuum. Finally, we present a summary and conclusions and also discuss possible future directions.Comment: 1 Tabl

Why the Corporation Locks in Financial Capital but the Partnership Does Not

Each partner in an at-will partnership can obtain a cash payout of his interest at any time. The corporation, by contrast, locks in shareholder capital, denying general payout rights to shareholders unless the charter states otherwise. What explains this difference? This Article argues that partner payout rights reduce the costs of two other characteristics of the partnership: the non-transferability of partner control rights, and the possibility for partnerships to be formed inadvertently. While these characteristics serve valuable functions, they can introduce a bilateral-monopoly problem and a special freezeout hazard unless each partner can force the firm to cash out his interest. The corporation lacks these characteristics: shares are freely transferable, and no one can commit capital to a corporation without intending to do so. Therefore, in most corporations the costs of shareholder payout rights—which would include the cash-raising burden and a hazard of appraisal arbitrage-—would exceed the benefits

Why the Corporation Locks in Financial Capital but the Partnership Does Not

Each partner in an at-will partnership can obtain a cash payout of his interest at any time. The corporation, by contrast, locks in shareholder capital, denying general payout rights to shareholders unless the charter states otherwise. What explains this difference? This Article argues that partner payout rights reduce the costs of two other characteristics of the partnership: the non-transferability of partner control rights, and the possibility for partnerships to be formed inadvertently. While these characteristics serve valuable functions, they can introduce a bilateral-monopoly problem and a special freezeout hazard unless each partner can force the firm to cash out his interest. The corporation lacks these characteristics: shares are freely transferable, and no one can commit capital to a corporation without intending to do so. Therefore, in most corporations the costs of shareholder payout rights— which would include the cash-raising burden and a hazard of appraisal arbitrage—would exceed the benefits

Clearinghouses as Liquidity Partitioning

To reduce the risk of another financial crisis, the Dodd-Frank Act requires that trading in certain derivatives be backed by clearinghouses. Critics mount two main objections: a clearinghouse shifts risk instead of reducing it; and a clearinghouse could fail, requiring a bailout. This Article’s observation that clearinghouses engage in liquidity partitioning answers both. Liquidity partitioning means that when one of its member firms becomes bankrupt, a clearinghouse keeps a portion of the firm’s most liquid assets, and a matching portion of its short-term debt, out of the bankruptcy estate. The clearinghouse then applies the first toward immediate repayment of the second. Economic value is created because creditors within the clearinghouse are paid much more quickly, and other creditors are paid no less quickly, than they would be otherwise. The rapid cash payouts for clearinghouse members reduce illiquidity and uncertainty in the financial sector, the main causes of contagion in a crisis. And because the clearinghouse holds only liquid assets, it avoids the maturity mismatch between short-term liabilities and long-term assets that characterizes the balance sheets of many financial institutions. A clearinghouse therefore is much less likely than its members to fail during a crisis. To ensure that clearinghouses remain stable and systemically valuable, rulemakers should require clearing of a wide variety of derivatives contracts, but should limit clearinghouse membership to dealer firms

How Collective Settlements Camouflage the Costs of Shareholder Lawsuits

Corporations insure against liability in shareholder lawsuits by buying tiered coverage from multiple insurers who each cover a distinct segment of the potential damages range. Rather than negotiating to settle individually with the plaintiff, the insurers seek to reach a single, collectively binding settlement agreement. This combination of segmented coverage and collective settlements produces a conflict of interests: the corporation\u27s managers and some insurers are better off if the case settles pre-trial for the expected damages, while other insurers are better off going to trial. To force reluctant insurers to settle, courts have created a duty that can require an insurer to pay its policy amount when the plaintiff makes a settlement demand that exceeds that amount and another insurer or the corporation is willing to pay the rest. This duty to contribute biases negotiations toward settlements that overcompensate plaintiffs, thereby encouraging lawsuits of doubtful merit. The conflict of interests in settlement negotiations could be eliminated by allowing defense-side parties (defendants and their liability insurers) to settle separately their respective segments of the damages range. But this segmented approach to settlements is contrary to the private interests of managers because it eliminates the justification for the duty to contribute. That duty forces insurers to pay for settlements that they think are excessive or contractually uninsurable, thereby shielding corporate earnings reports—and managers\u27 incentive-based pay—from the costs of shareholder lawsuits resulting from the managers\u27 conduct

The New Business Entities in Evolutionary Perspective

In this essay, the authors first discuss the historical evolution of business entities, focusing on the primary role that creditor protection has played in that evolution. Next, the authors argue that, although legal scholars generally focus on limited liability when discussing creditor protection and the distinction between the corporation and the partnership, the principal feature distinguishing the corporation from the partnership is entity shielding -a term referring to the allocation of different rights to different groups of creditors in the assets of a firm. After discussing the importance of strong entity shielding a characteristic of the corporation but not the partnership -and how it complements limited liability, the authors conclude that the development of new business forms is the culmination of the process of extending strong entity shielding to unrestricted types of entities and, therefore, the new business forms should be viewed as generalizations of the business corporation rather than the partnership