Optimal Liability for Terrorism

This paper analyzes the normative role for civil liability in aligning terrorism precaution incentives, when the perpetrators of terrorism are unreachable by courts or regulators. We consider the strategic interaction among targets, subsidiary victims, and terrorists within a sequential, game-theoretic model. The model reveals that, while an "optimal" liability regime indeed exists, its features appear at odds with conventional legal templates. For example, it frequently prescribes damages payments from seemingly unlikely defendants, directing them to seemingly unlikely plaintiffs. The challenge of introducing such a regime using existing tort law doctrines, therefore, is likely to be prohibitive. Instead, we argue, efficient precaution incentives may be best provided by alternative policy mechanisms, such as a mutual public insurance pool for potential targets of terrorism, coupled with direct compensation to victims of terrorist attacks.

On the Demise of Shareholder Primacy ( Or, Murder on the James Trains Express)

The hypothetical introduced by Vice Chancellor Leo Strine\u27s Essay exposes an important arena of corporate governance where adherence to the traditional norm of shareholder primacy is particularly troublesome. In fact, it is hard to find an analogous domain of corporate governance law that is as jarringly discontinuous as that found in the factual circumstances suggested by Strine\u27s hypothetical. Explicitly, the legal scrutiny accorded to managers who resist a hostile acquisition depends critically on whether a court invokes the Revlon doctrine or the Unocal doctrine as the appropriate governing standard. Under the former (and its progeny), shareholder primacy arguments carry great (and nearly exclusive) weight: corporate directors must be able to demonstrate that its resistance is reasonably calculated to maximize short-term shareholder value. Under the latter doctrine, however, immediate shareholder interests are just one of a panoply of considerations that directors may use to justify resistance to a hostile bid. Moreover, the factual distinctions that separate a Revlon case from a Unocal case can be surprisingly modest and nuanced. Of course, a simple description of this legal discontinuity dramatically undersells the aims of the James Trains hypothetical. Indeed, the hypothetical itself spawns deeper questions about whether shareholder primacy arguments are normatively justified with principles transcending the historical path dependence of judicial precedent. Even when a company has committed to a course of action that would ordinarily invoke Revlon, why should shareholder interests trump those of corporate founders, employees, debtholders, communities, or other interested constituencies? This is a difficult question to answer, and it is routinely debated within the pages of countless law reviews, conference proceedings, and legal briefs every year. Like Strine, I have little interest in opining on the final result of this hypothetical if the dispute were litigated in the Delaware courts (though I earnestly hope that my former students would be part of the litigation teams billing hours on the issue). I have a few perspectives on the hypothetical, however, that diverge (albeit slightly) from Strine\u27s and that might be offered for general consumption

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