Flawed Assumptions: A Corporate Law Analysis of Free Speech and Corporate Personhood in \u3cem\u3eCitizens United\u3c/em\u3e

In the wake of the January, 2010 Supreme Court decision in Citizens United, special interest groups, citizens, and politicians alike have engaged in a rigorous debate about the role of corporate speech within our democratic process. The First Amendment issues raised in Citizens United - to that extent do corporations have a constitutionally protected right to participate in and influence our elections through expenditures - evoke larger questions about the roles, rights, and responsibilities of corporations within our society. This article concludes that the Supreme Court did not reference corporate law principles when analyzing the fundamental First Amendment debate in Citizens United and therefore rested its reasoning upon five flawed assumptions: (1) economic motivation of corporate speech, even corporate political speech, deserves no discount, (2) presence of a singular corporate voice, (3) insignificant threat of compelled speech, (4) lack of regulated speech, based solely on the identity of the corporate speaker, and (5) inapplicability of the equalization rationale to corporate speech. By examining the constitutional questions evoked in Citizens United through a corporate law lens, these assumptions are shown to be false. These flawed assumptions underlying the Court’s reasoning undermine the Court’s conceptualization of corporations and its holding that corporate political speech cannot and should not be treated differently from individual political speech

Locked In: The Competitive Disadvantage of Citizen Shareholders

In this Essay, I challenge the conventional corporate law wisdom that unhappy mutual fund investors paying high fees don’t need litigation or regulation to protect their interests because they should simply exit a fund and reinvest elsewhere. The exit solution, advanced by Professors John Morley and Quinn Curtis in Taking Exit Rights Seriously provided an elegantly simply solution to the problem of unhappy indirect investors (e.g., mutual fund investors) given that they are often low-dollar, low-incentive, rationally-apathetic investors facing enormous information asymmetries and collective action problems. According to their view, competition produced by exit, or the threat of exit, is the key to mitigating high fees in the mutual fund market. But what if some mutual fund investors are stuck and exit is, for them, an empty option? Such is the case for citizen shareholders who are the fastest growing group of new securities investors: those who enter the securities market through self-directed, defined contribution retirement plans such as a 401(k)—and who invest heavily in mutual funds and other securities. Drawing upon more recent scholarship by Ian Ayres and Quinn Curtis, Beyond Diversification, showing the continuing problem of high mutual fund fees, I examine the implications of hindered exit for citizen shareholders. Investing through defined contribution plans (i) adds investment costs; (ii) distorts competitive forces through limited exit options, conflicts of interests and share classes; (iii) fractures oversight liability; and (iv) introduces unique switching costs. These differences create a competitive disadvantage for retirement investors who are relatively locked-in with diluted exit rights. Thus, for citizen shareholders, exit and competition are not the hoped-for panacea. This Essay redirects corporate law scholarship’s attention to these unsophisticated, passive, and apathetic, but also socially and financially important, investors. Elusive exit suggests the need to reexamine regulatory and litigation strategies to better serve citizen shareholders

The Outside Investor: Citizen Shareholders & Corporate Alienation

This Article explores the creation and conundrum of citizen shareholders - investors who enter the securities market primarily through employer-sponsored defined-contribution plans, invest in mutual or index funds, and are saving for long-term goals like retirement. Citizen shareholders are a consequence of a retirement revolution, and are the fastest growing group of investors. Citizen shareholders are distinguishable from other shareholders on the grounds of choice, exit, and the number of intermediaries inserted into the investment chain in defined-contribution plans. They are largely missing from corporate policy and scholarship debates; few discussions have incorporated the growing reality that shareholder status has changed over the last several decades with how, why, and in what form individual investors enter the securities market. This group of investors, estimated to be nearly 75 million Americans, is alienated from traditional corporate governance mechanisms at both the operating company and the investment company levels. Citizen shareholders complicate corporate law assumptions about shareholder empowerment, exacerbate tensions between management and control, and undermine corporate regulatory solutions such as those advanced in Dodd Frank. Additionally, the disclosure-based regime required under federal securities and Employee Retirement Income Security Act ( ERISA ) laws are incomplete, fractured, and not tailored to the needs of citizen shareholders, a group of investors that includes low-dollar and often unsophisticated investors. As a result, citizen shareholders are long-term investors locked in a market system that rewards short-term performance and facilitates exit over activism. Second, citizen shareholders exercise constrained control over their self-directed accounts with limited investment options, virtually no control over fee structures that erode retirement savings, and splintered and incomplete information about their investments and the fees charged to them. Recognizing that retirement investments play a crucial role for the individual and for society, this Article proposes both theoretical and practical approaches to better incorporate the interests of citizen shareholders into the markets

Teaching LLCs by Design

Experiential learning is intended to contextualize studying the law and equip students with lawyering skills required in practice. “Experiential education integrates theory and practice by combining academic inquiry with actual experience.” From a pedagogical perspective, LLC-based experiential exercises provide an efficient vehicle to teach the traditional doctrinal foundation of LLCs such as the unique attributes of the entity i.e., limited liability with pass-through taxation and flexible management structures), the default statutory rules that govern LLCs, and a host of transactional skills. Teaching unincorporated business entities, particularly LLCs, presents a unique platform to design a course — or a course element — to provide students with opportunities to integrate doctrine and skills while developing students’ professional identities. This Article discusses how I use client-based problems to introduce students to the default rules of LLCs and other uncorporate entities and to develop skills such as problem solving, drafting, and negotiation, as well as to cultivate students’ ethical and professional identities

Flawed Assumptions: A Corporate Law Analysis of Free Speech and Corporate Personhood in \u3cem\u3eCitizens United\u3c/em\u3e

In the wake of the January, 2010 Supreme Court decision in Citizens United, special interest groups, citizens, and politicians alike have engaged in a rigorous debate about the role of corporate speech within our democratic process. The First Amendment issues raised in Citizens United - to that extent do corporations have a constitutionally protected right to participate in and influence our elections through expenditures - evoke larger questions about the roles, rights, and responsibilities of corporations within our society. This article concludes that the Supreme Court did not reference corporate law principles when analyzing the fundamental First Amendment debate in Citizens United and therefore rested its reasoning upon five flawed assumptions: (1) economic motivation of corporate speech, even corporate political speech, deserves no discount, (2) presence of a singular corporate voice, (3) insignificant threat of compelled speech, (4) lack of regulated speech, based solely on the identity of the corporate speaker, and (5) inapplicability of the equalization rationale to corporate speech. By examining the constitutional questions evoked in Citizens United through a corporate law lens, these assumptions are shown to be false. These flawed assumptions underlying the Court’s reasoning undermine the Court’s conceptualization of corporations and its holding that corporate political speech cannot and should not be treated differently from individual political speech

Retirement Revolution: Unmitigated Risks in the Defined Contribution Society

A revolution in the retirement landscape over the last several decades shifted the predominant savings vehicle from traditional pensions (a defined benefit plan) to self-directed accounts like the 401(k) (a defined contribution plan) and has drastically changed how people invest in the stock market and why. The prevalence of self-directed, defined contribution plans has created our defined contribution society and a new class of investors — the citizen shareholders — who enter private securities market through self-directed retirement plans, invest for long-term savings goals and are predominantly indirect shareholders. With 90 million Americans invested in mutual funds, and nearly 75 million who do so through defined contribution plans, citizen shareholders are the fastest growing group of investors. Yet, citizen shareholders have the least protections despite conventional wisdom that corporate law and ERISA protections safeguard both these investors and their investments. As explained in an earlier paper, citizen shareholders do not fit neatly within the traditional corporate law framework because their investment within a defined contribution plan restricts choice and their indirect ownership status dilutes their information and voting rights, as well as exacerbates their rational apathy as diffuse and disempowered “owners.” Additionally, the retirement revolution from pensions to 401(k)s has changed not only how individuals prepare for retirement, but also who bears certain risks that affect the retirement nest egg. Under self-directed defined contribution plans, but not defined benefit plans, citizen shareholders bear the risks of poor market performance, longevity, and information asymmetries, as well as plan administrative costs and the life-long responsibility of asset management. Research indicates that citizen shareholders, particularly those who are women, minorities and those with lower-education levels, do not have the financial literacy to undertake these tasks in a way to maximize both individual and society-wide retirement savings. These changes, and their consequences, are firmly established in our defined contribution society and are a result of the retirement revolution. Yet, these changes are not widely understood by individuals saving for retirement, nor have they been incorporated into how we think and talk about shareholders in and outside of the academy. In this Article, I build on previous work, which articulated the citizen shareholder status and its incompatibility with traditional corporate law by identifying and explaining the second prong — that citizen shareholders have substantially weakened protections under ERISA and bear substantially increased risks and responsibility in our defined contribution society

Teaching LLCs by Design

Experiential learning is intended to contextualize studying the law and equip students with lawyering skills required in practice. “Experiential education integrates theory and practice by combining academic inquiry with actual experience.” From a pedagogical perspective, LLC-based experiential exercises provide an efficient vehicle to teach the traditional doctrinal foundation of LLCs such as the unique attributes of the entity i.e., limited liability with pass-through taxation and flexible management structures), the default statutory rules that govern LLCs, and a host of transactional skills. Teaching unincorporated business entities, particularly LLCs, presents a unique platform to design a course — or a course element — to provide students with opportunities to integrate doctrine and skills while developing students’ professional identities. This Article discusses how I use client-based problems to introduce students to the default rules of LLCs and other uncorporate entities and to develop skills such as problem solving, drafting, and negotiation, as well as to cultivate students’ ethical and professional identities

Will Swing Pricing Save Sedentary Shareholders?

This Article explains and explores new Securities Exchange Commission rules authorizing optional swing pricing for mutual funds. Swing pricing is an anti-dilution tool intended to protect sedentary investors who enter, and stay, in a fund. Workers setting aside money for retirement are often sedentary investors. Mutual funds are the mainstay vehicle for retirement investors, yet as sedentary shareholders they can experience significant asset dilution over their savings lifetime. Swing pricing—a mutual fund pricing mechanism that allocates transaction costs to the triggering shareholders—could save sedentary shareholders, collectively, billions of dollars. The mutual fund industry’s operational complexities and competing regulatory obligations may prevent funds from immediately utilizing swing pricing once it becomes effective in November 2018. The biggest obstacle is a time conflict reminiscent of the chicken and egg problem. Under current industry operations, mutual funds will not receive the trading information necessary to adjust the daily price of the fund (swing the price) until after funds have to finalize the price adjustment. Blockchain technology—offering secure, automated, and verified ledgers—may present an operational path forward for the industry. The SEC’s swing pricing approach leaves unanswered how funds will overcome these, and other, hurdles. This Article explores the components of swing pricing, as well as the objections to and perceived benefits of swing pricing, and concludes with two unique perspectives on the SEC rules: one academic and one professional. This Article maintains that mutual funds should take on the challenge of implementing swing pricing, and that market incentives will pave the way