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Accommodating Blockchain

Jonathan Rohr and Aaron Wright, Blockchain-Based Token Sales, Initial Coin Offerings, and the Democratization of Public Capital Markets (revised Mar. 24, 2018), available at SSRN.

Every once in a while I wake up and realize that there’s a new cluster of highly technical stuff that I need to learn about to stay current in my field. My usual recourse is to find a law review article that gets me up to speed. It usually works, but not always. Back in the 1990s, for example, the leading technical topic was securitization and structured products. I read a lot of articles, but none of them got me where I knew I needed to be. Most were written by practitioners unable to get into teaching mode and present the material in an intelligible way. It took the Enron disaster to prompt the appearance of an accessible literature. Even then production was spotty, as we learned to our dismay when the economy collapsed in 2008. So, I like law review articles that teach me highly technical things that I need to know. And I really like law review articles that keep me engaged while teaching the lesson. As any business law classroom teacher knows, this is very hard to do. Complex mechanics are not easily explained, and even a successful explanation can get so wrapped up in itself as to lose the student. When an author pulls off the job in an article, the result can be a wonder to behold.

I worry that such exercises are undervalued in the present legal academic environment, for they are susceptible to snide dismissal as “inside baseball.” Such dismissals are wrong-headed. Sometimes just getting the description right and following up with a well-constructed law-to-fact analysis is vastly more valuable than any application of theoretical gloss. As Enron and the financial crisis demonstrated, the task should not be left over to practitioners. A year ago, bitcoin, blockchain, and tokens loomed up as the latest such technical topic, putting me in the market for a really good law review exposition. I found it in Blockchain-Based Token Sales, Initial Coin Offerings, and the Democratization of Public Capital Markets, by Aaron Wright and the late Jonathan Rohr. The paper does three things: first, it gives its reader the tech 101; second, it confronts the big question whether blockchain-based tokens are securities under the 33 Act; third, it addresses some law reform suggestions to federal lawmakers. It succeeds beautifully at all three tasks.

The tech lesson is masterfully (and succinctly) taught. One feels as if one is encountering the techies directly as they mint, buy, and trade this stuff. It turns out that there are many variations on the basic theme of token sale. The authors get the reader through this thicket with a clear three-part typology, which they flesh out with examples of real world deals, some of which make for amazing reading. There is a big descriptive claim: blockchain tokens are to finance and investment what the internet was to information and communication; we are at a moment in history. Blockchain and the internet combine to put startups and capital together super-quickly, removing layers of frictions in one fell swoop. This reader came away convinced. Venture capital is feeling the competitive heat already. Wall Street, the City, and the world’s other financial centers are next.

The paper then turns to the “is it a security” question and a series of topics I dread—first SEC v. Howey and its progeny in the federal courts and in SEC no action letters, and then the registration exemptions, 4(a)(2), Reg D, Reg A, Rule 144A and crowdfunding. The paper maintains its level of interest as it applies tech fact to securities law, which is no mean achievement. There’s a dualism between investment token offerings (which are the functional equivalent of a sale of limited partnership interests by a venture capital firm and almost always securities) and utility token offerings (which exchange value for access to technology but also invite speculative trading and may or may not be securities depending on the facts). The latter are the problem and the paper shows convincingly that existing securities law does not offer a framework of inquiry capable of a satisfactory solution, a bad situation that gets worse when the registration exemptions are considered. Nothing quite fits, and there will be cases where exemptions make perfect sense.

The paper’s third part successfully turns to law reform. The setup is blunt: wake up and fix this you folks at the SEC or token offerings implicating registration all get done abroad, disadvantaging potential US users of technologies on offer. (The authors helpfully explain exactly how US actors can do this under US securities law and point out the jurisdictions seeking business in a regulatory race to the bottom, Switzerland and Singapore most prominently.) Yes, there’s a fraud problem, but US regulators should not let it hamstring their responsiveness. The suggestions work at two-levels. First, putting reform of statutes and regs to one side, the authors revise and restate the Howey jurisprudence into a collection of factors that will provide useful guidance in the marketplace. I am skeptical of such exercises, but came away impressed. The authors go back to the technology itself and use it to draw the line between a security and a product for consumption. The authors then propose some sensible statutory and regulatory adjustments: (1) when the token is a security, the registration requirements need to follow from an evolving practice in the token market rather than from pre-existing regulatory patterns, (2) the exemptive regs need to be tweaked, and (3) the SEC can’t look to exchanges to regulate here.

Would that there had been a paper this good when I was trying to figure out what a special purpose entity was back in the 1990s.

Cite as: Bill Bratton, Accommodating Blockchain, JOTWELL (October 24, 2018) (reviewing Jonathan Rohr and Aaron Wright, Blockchain-Based Token Sales, Initial Coin Offerings, and the Democratization of Public Capital Markets (revised Mar. 24, 2018), available at SSRN),

Implications of Brexit for Innovation in Private Law

Horst Eidenmueller, Collateral Damage: Brexit's Negative Effects on Regulatory Competition and Legal Innovation in Private Law (May 7, 2018), available at SSRN.

The dark side of Brexit is that it illustrates dramatically the contrast between a political context which operates largely on the basis of slogans and a business and economic context where details matter. When Airbus warned of the risks to businesses if the UK crashes out of the EU without a deal, Jeremy Hunt, the Health Minister, described the intervention as inappropriate. Mark Carney, the Governor of the Bank of England, has similarly been criticised for pointing out some of the economic disadvantages associated with Brexit.

The bright side of Brexit is that it is producing some excellent scholarship in a range of disciplines as scholars try to understand its causes and potential effects. In this working paper Horst Eidenmueller argues, convincingly, that Brexit will interfere with desirable innovation in private law in Europe, both in the EU and in the UK. This is one of many examples of potential harm from Brexit to the UK and to the remaining Member States of the EU.

English lawyers like to think that English law is particularly well-adapted to dealing with new commercial problems (for example see this recent speech by Sir Geoffrey Vos, Chancellor of the High Court). English law is flexible, and English judges have tended to be pragmatic. And when English judges created uncertainties for the financial markets, as in the local authority swaps cases, other institutions have focused on promoting legal certainty. The Bank of England encouraged the formation of the Financial Law Panel to address issues of uncertainty. The current Financial Markets Law Committee continues the work the Financial Law Panel began, although it stresses its independence from the Bank of England. The creation of a Financial List as a specialist court in the UK to deal with cases involving the financial markets and with a new test case procedure “to facilitate the resolution of market issues on which there is no previous authoritative English precedent” is a recent development in this process of ensuring that English law works well for financial transactions, including international transactions.

Horst Eidenmueller argues that Brexit is likely both to reduce incentives for EU Member States to improve their own laws, and to reduce incentives for the UK to innovate. In addition, the loss of the UK’s involvement in EU law-making processes will reduce the impetus for development of EU private law. Thus, Brexit will likely “reduce the level of efficiency-enhancing legal innovation in Member States’ and European private law.”

The article supports these arguments with examples from the evolution of company law, insolvency law, and contract law and dispute resolution. Eidenmueller’s examples show in particular how competition from English law has provoked efficiency-enhancing developments in Germany. But he also notes that Germany and France have decided to enter the competition to attract business disputes to their courts, including providing for proceedings in English.

The topic of the influence of the UK on the development of EU (rather than Member State) private law is a large one, and in this article Eidenmueller focuses on some illustrative examples of the UK’s efforts to influence the development of EU law. Here the results are somewhat mixed, but in some cases (such as the Alternative Investment Fund Managers Directive) he argues that the UK did have a significant impact on the final version of EU rules (even if critics based in the UK are not entirely satisfied with the result).

The article then needs to address the significant uncertainties about the rules that will apply after Brexit. Nevertheless, Eidenmueller argues that London will be less attractive as a litigation venue, and that English law will therefore be less attractive as a governing law. And he foresees harm to the UK market for international restructurings. It is not a pretty story for the UK. But the EU stands to lose out also. If only there had been a way for David Cameron to have the opportunity to read scholarship like this before committing to the referendum decision.

Cite as: Caroline Bradley, Implications of Brexit for Innovation in Private Law, JOTWELL (September 25, 2018) (reviewing Horst Eidenmueller, Collateral Damage: Brexit's Negative Effects on Regulatory Competition and Legal Innovation in Private Law (May 7, 2018), available at SSRN),

The Human Side of Markets

Too often when discussing matters of markets and finance, policymakers and scholars lose focus of the basic fact that people are at the core of markets and finance. It is people who move markets. It is people who generate supply and demand. It is people who need financing—for homes, for investments, for education, for healthcare, and other life decisions. Behind the faceless reams and terabytes of data are people who make up the fuels and gears of the marketplace. Behind the powerful models and promising technology that frequently dominate the contemporary financial markets are people. Properly recognizing the fact that people are at the heart of markets and finance is one of the critical keys to better understanding and harnessing the power of markets and finance.

Two illuminating new books, one by a legal scholar and one by a financial economist, delve into different noteworthy aspects of the human side of markets. Professor Mehrsa Baradaran of the University of Georgia School of Law recently published The Color of Money: Black Banks and the Racial Wealth Gap, a book that examines the long-lasting effects of racism, markets, and regulation on Black communities in the United States; and Professor Andrew Lo of the Massachusetts Institute of Technology’s Sloan School of Management recently published Adaptive Markets: Financial Evolution at the Speed of Thought, a book that offers a new and more human-oriented framework for thinking about markets. Each book is distinct in their areas of focus and scope, but they both share a fundamentally human-centered perspective about the promising and perilous roles of people in market and financial decisions.

In The Color of Money, Professor Baradaran takes a historical look at the role of Black banks in connection with the economic struggles of Black communities in the United States. The book narrates the intertwined stories of Black banks and the communities that they were originally designed to serve from the time of the Emancipation Proclamation to present day. With a scholar’s talent for research and a lawyer’s power for persuasion, Baradaran makes a credible case about some of the longstanding obstacles faced by Black banks and Black communities on the road to economic success and wealth. At the start of the book, Baradaran lays out her primary argument: “Housing segregation, racism, and Jim Crow credit policies create an inescapable economic trap for black communities and their banks. Black banking has been an anemic response to racial inequality that has yielded virtually nothing in closing the wealth gap.” (P.2.)

In subsequent chapters, she bolsters her case with historical and political evidence stretching from Lincoln to Trump. She examines how politicians from both sides of the aisle, with charity and malice, frequently made it harder for Black banks and Black communities to succeed. The purpose of the book was largely to highlight the systemic and historical roots of the racial wealth gap via the lens of Black banks, and not to offer up any specific solutions to this pernicious problem. Nevertheless, by laying out the problem so thoughtfully, The Color of Money, offers a great starting point for anyone thinking about possible solutions to the persistent problems that implicate money and race.

In contrast to Professor Baradaran’s sharp and specific focus on Black banks, Professor Andrew Lo’s Adaptive Markets turns his lens on the broader topic of human behavior and financial markets by proposing what he terms as the adaptive market hypothesis. According to Lo, the hypothesis is “based on the insight that investors and financial markets behave more like biology than physics, comprising a population of living organisms competing to survive, not a collection of inanimate objects subject to the immutable laws of motion…it implies that the principles of evolution—competition, innovation, reproduction, and adaptation—are more useful for understanding the inner workings of the financial industry than the physics-like principles of rational economic analysis.” (P. 2.)

While some may expect a book focused on a new economic hypothesis to be highly technical and dry, Lo’s gift for narrative makes the distillation of his idea an easy and insightful read. Through discussions and stories that touch on the personal as well as the academic, Lo traces how he arrived at the hypothesis through twelve chapters. The book draws on a rich body of interdisciplinary research from biology, psychology, neuroscience, engineering, and computer science. Ultimately, the book argues credibly and optimistically that market mechanisms can be better leveraged to our collective social benefit when we adapt them more thoughtfully for the people involved in the marketplace.

In the end, The Color of Money and Adaptive Markets offer two deeply researched and well-told stories about two different aspects of markets and finance from two leading scholars of two distinct fields of study. Nonetheless, despite their critical differences, both books impart a common fundamental lesson about the importance of better accounting for the human factor when thinking, regulating, and acting within finance and markets. To think and act about markets and finance wholly divorced from their human participants, beneficiaries, and victims—while theoretically elegant—frequently prove to be endeavors in folly and foil with serious implications. As such, business executives, scholars, and policymakers can certainly do better to heed this shared lesson of Professor Baradaran and Professor Lo to enhance and refine the already awesome means of markets and finance towards better ends.

Cite as: Tom C.W. Lin, The Human Side of Markets, JOTWELL (August 13, 2018) (reviewing Mehrsa Baradaran, The Color of Money: Black Banks and the Racial Wealth Gap (2017). Andrew Lo, Adaptive Markets: Financial Evolution at the Speed of Thought (2017). ),

Distributed Ledgers, Traceable Shares, and the Division of Power in Corporate Law

George S. Geis, Traceable Shares and Corporate Law, 113 Nw. U. L. Rev. __ (forthcoming 2018), available at SSRN.

Theories of corporate governance, and associated normative claims about the optimal balance of power between shareholders and boards of directors, often gloss over—or ignore entirely—”the recessed plumbing of back-end clearing processes.” To be sure, growing empirical literatures inform such debates by illuminating various strategies of exit and voice deployed by important categories of investors, yet the accuracy, efficiency, and integrity of securities trading and voting mechanisms often go unexplored.  In the article Traceable Shares and Corporate Law, George Geis provides a fascinating window onto the complex mechanics of clearing and voting in publicly traded companies—and particularly how “distributed ledgers and blockchain technology” may revolutionize these processes, with potentially profound implications for corporate law and governance.

As Geis recounts, by the 1960s, transfer of physical stock certificates had become unworkable due to substantial growth in trading volume.  The solution to this problem was “unidentified fungible bulk” shareholding.  Shares now typically reside at the Depository Trust & Clearing Corporation (DTCC), with legal title held by a subsidiary called Cede & Company, which appears as the record holder of the stock in corporate stockholder lists.  Accordingly, when the stock is sold from one investor to another, DTCC simply “transfers beneficial ownership electronically from seller to buyer via bookkeeping adjustments”—obviating the need for slow, cumbersome, and expensive transfers of physical stock certificates.

While an elegant solution in the abstract, however, the mechanics remain what Geis aptly terms “a kludge.”  This results largely from the array of intermediaries—notably banks, brokerages, and third-party service providers—involved in the complex process of transmitting trading and voting information up and down the chain between DTCC, at one end, and “beneficial” shareholders, at the other. For example, the process of voting shares in a publicly traded company involves execution of a “global proxy” by Cede, the record holder, permitting votes for shares held at DTCC to be cast by custodian banks and brokerages. These in turn either execute further proxies to beneficial shareholders or (more likely) request voting instructions from them—an approach that firms may, in turn, “outsource…to a third-party provider.”

Given the complexity and the number of parties involved, it is hardly surprising that such processes could impact legal rights that hinge on identification of particular shares with particular investors.  For example, § 11 of the Securities Act of 1933 provides a potent cause of action for investors who acquire shares issued pursuant to a materially misleading registration statement—but courts have tended to interpret this provision to require that the shares in question be directly traceable, with mathematical certainty, to the defective registration statement. This requirement is easily met when IPO shares represent the only publicly traded stock, yet may prove impossible to meet if multiple vintages of stock were available in the secondary market at the time of purchase—due to fungible bulk clearing. Likewise, establishing appraisal rights following a merger under § 262 of the Delaware General Corporation Law (DGCL) requires that the shares in question were not voted in favor of the merger—which could prove problematic if the complex multi-step voting mechanics described above go awry.

Against this backdrop, however, Geis argues that we find ourselves in “an important moment for corporate law…because new technology is approaching a state where clearing and settlement systems may soon support traceable shares.” Building on the detailed yet accessible technical introduction that he provides, Geis observes that “it has become possible to envision how distributed ledger technology might be adopted to permit direct and rapid settlement of stock trades.” This, he suggests, could permit development of “a ‘golden ledger’ of stockholders, reflecting the most current ownership data and substantially reducing (or perhaps even eliminating) the need for the custodial arrangements” described above.

While Geis acknowledges that any effort to develop and implement such a system would face formidable legal and technological hurdles, he concludes that “the odds of a transformation cannot be ignored” and provides a survey of the significant changes we might witness if each share of publicly traded stock could literally be traced to a particular shareholder.  Straightforwardly, the action for materially misleading registration statements under § 11 of the Securities Act would become more widely available in secondary markets, as multiple vintages of stock would no longer preclude direct tracing. Identifying who should be entitled to pursue an appraisal action under DGCL § 262 would likewise become a simpler matter, as the voting record for the shares in question would be more readily determinable. More generally, we might expect “a reduction of unintentional errors,” as multiple checks on accuracy are a hallmark of blockchain technology. At the same time, such a system might curb so-called “empty voting”—that is, voting shares “without economic exposure to the consequences of a decision”—by obviating the practical need to key voting power to a “record date” falling weeks in advance of the actual vote (thereby limiting potential for voting rights to be severed from economic rights by a sale between those dates). By the same token, traceable shares might facilitate new forms of remedies—for example, permitting plaintiffs in securities class actions to “claw back” gains from investors who benefited from corporate misrepresentations (say, by selling their stock at an inflated price).

Perhaps most intriguing of all, however, are the implications for long-standing debates regarding corporate governance theory. Minimally, traceable shares could raise thorny questions “about the circumstances under which an outside shareholder (or other party) should be able to access” newly available “real time data about the identification and ownership stake of all shareholders”—access to which could readily fuel shareholder activism.  At the same time, “a more accurate system for tabulating votes and parsing out other legal rights might cause some scholars to reconsider their positions” on the optimal balance of power between shareholders and boards in publicly traded companies. Where this might lead necessarily remains uncertain, given the nascent state of the technology and the fact that (by hypothesis) we cannot know what such granular data might reveal about the interests and incentives of various categories of investors. Regardless, Geis compellingly argues that traceable shares could impact corporate law and governance in fundamental ways, and the article provides a nuanced and insightful guide to this complex and dynamic landscape.

Cite as: Christopher M. Bruner, Distributed Ledgers, Traceable Shares, and the Division of Power in Corporate Law, JOTWELL (July 11, 2018) (reviewing George S. Geis, Traceable Shares and Corporate Law, 113 Nw. U. L. Rev. __ (forthcoming 2018), available at SSRN),

How Much Do You Really Know About Fraud?

How did mail fraud come to be a powerful, all-purpose statutory tool for pursuing financial fraud in the United States? How does financial fraud resemble and differ from other kinds of commercial fraud—false advertising, misrepresenting the qualities of goods or land, or making impossible promises a seller never intends to keep? And is there, as there seems to be, a connection between novelty and innovation—new markets, new products, new frontiers—and fraud?

Ed Balleisen’s new book, Fraud: An American History from Barnum to Madoff, examines fraud, writ large in America from the end of the civil war through the turn of the millennium. As anyone who knows Balleisen’s work would expect, Fraud is exceptionally researched, observant, thoughtful, and rendered in charming prose. Fraud spans the familiar legal silos to provide a sweeping history of different varieties of fraud, and their regulation. This is useful, and the book works because of Balleisen’s disciplined focus on his core questions—how fraud manifests, how regulatory anti-fraud strategies have evolved across time, how and when industry self-regulation has intervened to control it, and how judicial institutions and processes have influenced anti-fraud efforts. The book examines a recurring toggle between interventionist and laissez-faire regulatory approaches; the venerable, if inconsistent and imperfect, tradition of industry self-regulation; and the seemingly perennial link between influence (or lack thereof), and punishment (or lack thereof). It makes a remarkable contribution to our understanding of how fraud and its regulation have evolved thus far, and the conditions out of which our current regulatory models developed.

It turns out that, in telling ways, regulation of fraud maps onto social priorities across time. Through the microcosm of fraudulent conduct and its regulation, Balleisen’s narrative exposes all the richness, promise, contradiction, and imperfection of American society and government. For example, where social status matters—as it did in the tight, homogeneous 19th century business establishment—it will matter to fraud enforcement too. One aggressive businessman with some sketchy conduct in his past will skate through to fame and fortune (see Richard W. Sears of Sears, Roebuck), while another will be ruined (see St. Louis publisher and banker Edward Gardner Lewis).

Balleisen also makes clear the abiding link between moral outrage, and core social characteristics or values. The variable forms that exhortative anti-fraud campaigns take across time tell us something about American society across time. Balleisen describes Better Business Bureau rallies in the early 20th century that were reminiscent of Protestant revival meetings; of urgings to be “a man” and therefore upstanding in the 1950s; and of claims, throughout the 20th century that fraud (or, alternatively, regulatory efforts to curb it) was “anti-American.” Predictably, more than once, such moral statements have shaded into anti-immigrant or anti-Semitic sentiment. Also predictably, though there were populist moments in which farmers or the poor were front-and-center, most anti-fraud campaigns were primarily directed toward protecting the white middle class. And yet, we should not underestimate the broader success of regulation, which inures to everyone’s benefit. I can go to the garden store to buy fertilizer, confident that it contains what it says it does. Blatant frauds like the Volkswagen emissions scandal are the exception now, at least with respect to tangible products.

One social norm is especially central, and it has dominated both opportunities for fraud and anti-fraud regulation. That is capitalism. Fraud makes clear just how thin is the line between “acceptable” capitalist pursuit of profits and “unacceptable” deceit. Particularly in boom times, capitalist enthusiasm soars and regulatory waters seem to recede. Why didn’t merit-based “blue sky” securities laws gain a more permanent foothold, for example, given how energetic the populist moment that engendered them was? Perhaps it all just seemed so burdensome during the Roaring Twenties, when everyone seemed to be getting rich quick. Balleisen also tells a series of intriguing stories about the links between novelty—new markets, new products, new frontiers—and fraud. In innovative contexts, fraud often surrounds a nugget of real promise. Novelty entails uncertainty, which blurs the line between honest, excessive optimism and outright deceit. And yet, novelty also both attracts fraudsters, and makes it harder to recognize and track their misbehavior. (Is it too obvious to mention cryptocurrencies here?)

Law has played both sides of the fostering-innovation-versus-protecting-investors dialectic. Law can be the mechanism through which fraudsters are stopped, information asymmetries are addressed, and potential victims are protected; however, law is also the means through which alleged fraudsters raise procedural complaints, claiming that state action is over-intrusive or that it violates their rights. This is not surprising: that balance is fundamental to what we mean by the Rule of Law. Still, watching those competing imperatives rise and fall across time in the context of fraud illuminates just how dependent legal practice is on its normative environment, and how implicated it is in our sometimes internally inconsistent sentiments about both capitalism and fairness. Industry self-regulation has reflected some of the same tensions: industry sometimes pressed its advantage where it could, arguing for self-regulation rather than state oversight where public sentiment seemed to allow it. And yet industry also got ahead of state regulation and implemented its own meaningful anti-fraud strategies, during times when public sentiment seemed to demand that instead.

In the end, as this history of fraud and its regulation show us, law remains a tool rather than a force unto itself. Law can occasionally change norms, but there are limits. Law-in-action finds its level, contingent on and subordinate to the dense network of norms, power and influence, and historical context in which it is embedded. If this is true, we should end with a question: what does it mean that virtually no one has been criminally prosecuted for the multiple financial frauds we have collectively endured over the last fifteen years, which Balleisen tells us are greater in magnitude and frequency than they have been at any other time in the last century?

Cite as: Cristie Ford, How Much Do You Really Know About Fraud?, JOTWELL (June 14, 2018) (reviewing Ed Balleisen, Fraud: An American History from Barnum to Madoff (2017)),

Talking Out of Both Sides of Your Mouth

James W. Coleman, How Cheap is Corporate Talk:? Comparing Companies’ Comments on Regulations with Their Securities Disclosures, 40 Harv. Envtl. L. Rev. 47 (2016), abridged in 47 ELR 16081 (August 2017).

It doesn’t take masses of data or high-powered statistics to generate important results. It takes a good question. James Coleman asks one and thoroughly massages it for insight.

Corporations exercise their speech in multiple audiences. Marketing addresses consumers. The Human Resources Department addresses employees. Coleman focuses on corporate speech to the SEC and the EPA about the proposed Renewable Fuel Standard between 2009 and 2013.

The number of corporations whose statements in the rule-making procedure and in their annual reports can be compared are small. In 2009, Professor Coleman studied 33 corporations and only 11 in 2013. The small number is not as significant as the lessons we learn when we compare what is said to these two audiences.

The messages are different. To the SEC, in their Annual Reports (10-K’s ), corporations generally minimize the impact of the proposed rule on their business. To the EPA, some holler that the rule will be unenforceable, cause them ruin and bring harm to the United States. Not a surprising result, but nicely demonstrated.

Royal Dutch Shell provides a good example. It spoke out of both sides of its mouth in 2013. It told the EPA that the Renewable Fuel Standard would “limit the supply of gasoline” and result in “severe economic harm” to its consumers and the public (at 70). In its Annual Report for 2013, Royal Dutch Shell wrote that as a result of “new energy policies in…the USA…[t]he…market for biofuels is growing…[and] We are one of the world’s largest biofuels producers” (71 n. 110).

The mention of the biofuels market is noteworthy. Regulations often will impact corporations differently. Depending on the corporations’ investment in ethanol, corporations differed in their responses to the Renewable Fuel Standard. Those invested in ethanol and biofuels sometimes urged the EPA on. Those who didn’t warned the EPA about the Standard.

The mixed messaging presents a particular problem from a new governance perspective. The new governance, unlike the old command-and-control, relies on corporate cooperation with regulation. Corporations are supposed to contribute their energies and their information constructively, both in their investor reporting and their communications with agencies. In their annual reports, corporations provide information, but more than that, they convey how their energies will be directed so that investors can make predictions about growth. These discussions of their energies should not be mere puffery. The EPA, meanwhile, needed to know whether the rules that it was proposing were feasible for regulated companies. Companies in the industry have more information than does the agency about what realistically can be demanded, but have little incentive to be forthcoming, crying about over-regulation and change for the worse.

Professor Coleman suggests that the predictions in the 10-K’s “can be used to audit corporations’ regulatory submissions “ (at 54), referencing Rule 10b-5 liability. Rule 10b-5 imposes liability for mis-statements in the 10-K, a liability that does not exist when corporations are speaking to regulators during rule-making procedures. (Of course, the PSLRA extended safe harbor protections, but did not eliminate liability for false “predictions,” as Professor Coleman emphasizes.)

I am less sanguine than is Professor Coleman about the current viability of 10b-5 litigation to keep corporations honest when they speak to regulators. But, seeking consistency when corporations speak is desirable as a matter of good governance. Much work on corporate compliance is directed to ensuring that the tone at the top is spread throughout corporate undertakings. At the least, we should, as does Professor Coleman, pay attention when corporations speak out of both sides of their mouth.

Cite as: Robert Rosen, Talking Out of Both Sides of Your Mouth, JOTWELL (May 18, 2018) (reviewing James W. Coleman, How Cheap is Corporate Talk:? Comparing Companies’ Comments on Regulations with Their Securities Disclosures, 40 Harv. Envtl. L. Rev. 47 (2016), abridged in 47 ELR 16081 (August 2017)),

Corporate Political Activism 5.0

Elizabeth Pollman & Jordan M. Barry, Regulatory Entrepreneurship, 90 S. Cal. L. Rev. 383 (2017), available at SSRN.

Regulatory Entrepreneurship by Elizabeth Pollman and Jordan Barry provides a must-read thought provoking descriptive account of how certain companies influence and shape regulation in the modern economy. In short, “regulatory entrepreneurship” describes companies’ attempts to dismantle, weaken, and exploit gray areas in the preexisting regulatory architecture that impede a particular line of business. With clear illustrations the article sheds new light on the tactics employed by some of today’s fastest growing companies such as Uber and Airbnb to surmount regulatory obstacles.

Article’s Findings

The article distinguishes regulatory entrepreneurship (“RE”) from more reactive traditional modes of corporate political activism and lobbying where companies insulate themselves from competition and protect existing profit centers. In the traditional context, the article asserts that changing the law is not necessarily material to a company’s overarching business plan and usually constitutes a relatively small part of their overall operations and focus. By contrast “regulatory entrepreneurship” is more proactive and central to a company’s overarching business strategy and viability.

RE is best thought of as one of multiple forms of political advocacy companies utilize. Generally, companies shape and are shaped by their regulatory environments: they mobilize to alter the regulatory environment or they simply adapt to the preexisting regulatory and political context. RE reflects the former approach. It is distinct from the discussion of “regulatory arbitrage” in the corporate law literature where corporate actors merely adjust taking the “law as given, then try[ing] to take advantage of the law as best they can by making minor alterations to their behavior.” (P. 397.) RE is a process where companies proactively “seek to shape the legal environment to suit their needs instead.” (P. 397.) In practice such distinctions —RE versus regulatory arbitrage— may become blurry. Nevertheless, it is helpful to identify different methods of corporate political advocacy and possibly predict under what circumstances these different methods are likely to be successful and what types of companies are likely to use them. The article helps answer these important questions, and builds upon the literature in this area providing a more textured and contextual narrative.

Certain conditions foster RE: high profit potential; a company’s financial resources; and specific business features such as scalability, connectedness, and mass appeal. Law-related factors also contribute to the success of RE strategies. For example, certain types of regulation are more conducive to RE: regulations characterized by civil fines as opposed to criminal penalties, local and state regulations as opposed to national regulations, and unpopular regulations as opposed to popular ones. Although RE involves companies’ attempts to dismantle or weaken the existing regulatory architecture, actual repeal of regulation is not necessary for success if lax enforcement will suffice. Courts are not the most effective fora for RE; the legislative and executive branches, especially at the local and state level, are the preferred venues for regulatory entrepreneurs to exert influence.

RE is particularly popular among, but not limited to, startups and technology companies such as Uber (taxi regulations) and Airbnb (zoning regulations). Regulatory entrepreneurs tend to be well-financed-platform-oriented-start-ups, prioritizing rapid user growth over immediate profits, made possible by a large well-connected user base and an ecosystem of investors willing to support high risk growth strategies. (Pp. 430-431.) The article further suggests how an aggressive libertarian Silicon Valley start-up culture might contribute to the more aggressive tactics regulatory entrepreneurs use to bring legal change such as: breaking the law (i.e., asking for forgiveness rather than seeking permission from regulators); taking advantage of legal gray areas; mobilizing their users and stakeholders to thwart government action; and rapidly “growing too big to ban.” Pp. 398-406.)

Ultimately, the article predicts that RE will continue to grow along with the influence of regulatory entrepreneurs, due in part to regulatory entrepreneurs’ ability to mobilize large previously unorganized groups toward political action on their behalf. These developments have the potential to impact the balance of power among companies that shape local, state, and national policies in the future.

Article’s Implications
Is regulatory entrepreneurship good or bad?

The authors are noncommittal concerning whether RE results in optimal regulatory outcomes. They acknowledge that the goal of RE is profit, and there is no particular reason to expect companies engaged in RE to act in the public interest. They acknowledge RE’s benefit to the extent that existing laws or regulations may be antiquated, impede innovation, unduly restrict competition, and impose unnecessary costs on entrepreneurs, consumers, and the public. Taking a balanced approach, however, the article recognizes RE’s potential limitations. Regulations targeted by regulatory entrepreneurs, although a bit inefficient, could serve beneficial public welfare purposes that could be undermined and displaced or ignored by a regulatory entrepreneur’s narrow focus. Another important question is whether a regulatory entrepreneur’s top-down mobilization and manufacture of opposition to existing regulations reflects socially desirable outcomes or is simply another chapter in the regulatory capture story where users and consumers are manipulated as part of a broader scheme to influence the regulatory environment.

Another potential downside to RE involves expertise asymmetries between private sector companies and regulators. Regulators may not adequately study or understand the impact of new technological advances leading to suboptimal outcomes and unintended consequences. A standard critique of government bureaucracy is its slow pace responding to technological innovations. Yet delays resulting from prudent due diligence are preferable to hasty uninformed decision-making. RE is not simply a story of regulatory capture at the local, state, and national level, it may also reflect an expertise gap between government and private actors.

Is there a connection between the aggressive tactics employed by regulatory entrepreneurs, company culture, and internal controls?

The article mentions some of the criticisms and earlier scandals surrounding Uber. More recently, a high-profile scandal related to Uber’s handling of workplace sexual harassment contributed to the dismissal of Uber’s founder and CEO Travis Kalanick. Developments such as these raise questions whether companies engaging in RE are more prone to engage is overly aggressive competitive practices, dismiss widely accepted workplace norms, and have weak internal controls.

In conclusion, the article is an informative balanced assessment of a newer method of corporate political activism that will impact the shape of the regulatory environment and the balance of power among today’s companies.

Cite as: Omari Simmons, Corporate Political Activism 5.0, JOTWELL (April 20, 2018) (reviewing Elizabeth Pollman & Jordan M. Barry, Regulatory Entrepreneurship, 90 S. Cal. L. Rev. 383 (2017), available at SSRN),

A Dream Deferred?

Mariana Pargendler, How Universal is the Corporate Form? Reflections on the Dwindling of Corporate Attributes in Brazil (2017), available at SSRN.

The proliferation of what might generally be called the convergence literature over the past several decades has brought new insights into the study of corporate governance. In particular, it has allowed scholars to identify and seek to understand diversities in corporate practices, despite what appears to be more or less unity of form.

Mariana Pargendler’s excellent new paper brings exciting insight to the conversation. Acknowledging the apparent universality of the core features of corporate law, she engages in a study of Brazilian law and its evolution over the past several decades to demonstrate that Brazilian courts and legislators have significantly diluted these elements. Significant diminution of the protection of limited liability, legal personality and capital lock-in, share transferability, delegated management, and ownership by investors are leading to a well-functioning but distinctly different concept of business enterprise, while continuing to appear to maintain most of the structural features of the corporate form.1 Whether this transformation eventually will result in new legislation creating a new form of business enterprise is anybody’s guess, and Pargendler sensibly notes the recency of these developments and the inability to predict where they go. Nevertheless, as she notes: “In some respects, Brazilian law is dream come true for progressive corporate law scholars … .” (P. 53.) Her facilitation of that dream is a welcome addition to the literature.

Pargendler emphasizes these phenomena as uniquely Brazilian. But she also claims that “in many, though not all respects, there is at least a theoretical case that Brazil’s watered down corporate regime is the most efficient model – not only for Brazil, but everywhere,” (P. 5) observing that Brazil can be seen as “unknowingly” adopting a number of corporate reforms proposals developed by U.S. scholars.

This core argument derives from her analysis of the efficiency and distributional effects of Brazil’s reforms, as well as the complementarity of the core features of the corporate form. Several arguments she suggests might support her view: (i) the contingency of efficiency on the institutional environment, suggesting elimination of the formal causes of agency problems when the institutional environment is unable to properly address them, (ii) the self-reinforcing nature of decorporatization due to the complementarity of core features of the corporate form, and (iii) the promotion of greater distributional equity through decorporatization.

The paper proceeds through a careful and detailed description of the principal changes in Brazilian corporate law, encompassing the five core areas identified above. Pargendler then provides persuasive analysis of each of the efficiency arguments she proposes, at the same time cautioning that the recent development of these phenomena prohibits strong conclusions at this point. Finally, she explores the applicability of Brazil’s reforms and her arguments to other nations, especially developing countries.

The paper is fascinating. More important, Pargendler has opened up a truly new perspective for thinking about the way we should understand the corporate form and how we should think about its universal applicability. We have long understood that practices within the standard form diverge among nations. Pargendler takes the bold new step of proposing that forms can and, perhaps, should, change (and perhaps converge) as well.

  1. Some of the changes apply primarily to close corporations, “but the trend toward decorporatization in Brazil is not limited to close corporations.” (P. 53.) In addition Pargendler notes, among other arguments that even if the major changes were limited to close corporations, they nevertheless would be important because of the importance of close corporations to the economies of many countries.
Cite as: Ezra Mitchell, A Dream Deferred?, JOTWELL (March 29, 2018) (reviewing Mariana Pargendler, How Universal is the Corporate Form? Reflections on the Dwindling of Corporate Attributes in Brazil (2017), available at SSRN),

Saving America’s Future From the Way We Save Now

William A. Birdthistle, Empire of the Fund: The Way We Save Now (2016).

Last spring, I decided to teach a research seminar on the investment fund industry and regulation. Scoping out available literature, I picked up William Birdthistle’s recent book, Empire of the Fund – and, literally within minutes of reading, knew that I had found the perfect anchoring text for the seminar. More than that, I was hooked. Over and over again, the book made me nod my head and raise my eyebrows, in a single moment of recognition and enlightenment. It made me shake my head in anger and wrinkle my forehead in puzzlement. It made me laugh out loud as I turned pages sparkling with humor and brilliance, and it made my heart heavy as I stopped to think about what made it all so funny. I finished the book in one sitting, and it was an experience.

That’s because Professor Birdthistle’s book is not just about the nuts and bolts of mutual funds: it is ultimately about all of us, ordinary Americans trying to save some of our hard-earned money for such scary and inevitable things like old age. Birdthistle is using the familiar structure of a mutual fund as an institutional prism through which to assess the consequences of America’s grand experiment with putting the financial responsibility for retirement squarely on individuals, rather than society as a whole. Since the 1980s, most Americans – or, at least, the lucky ones who can afford to – have been saving for retirement by contributing a portion of their earnings to 401(k) plans, which then channel the bulk of these savings to mutual funds. We, individual savers, ostensibly have the power to choose where to invest our money. In reality, however, these choices are largely meaningless: ultimately, we are all captive investors in the sprawling, incestuous, multi-trillion-dollar mutual fund empire. But, the book asks, do we really understand how, and for whose benefit, this empire operates?

To answer this fundamental question, Birdthistle meticulously explores and exposes deep structural flaws in the existing mutual fund system. His analysis is couched in deliberately, and suggestively, clinical terms. The book starts by laying out the basic anatomy of a mutual fund: its purpose, structure, and economics. It then proceeds to diagnose some of the main “diseases and disorders” plaguing that system: excessive and non-transparent fees, unreliable valuations, conflicts of interests, and outright manipulative behavior on the part of fund managers seeking to maximize their own profits at the expense of fund investors. The picture that emerges is both nuanced and easily comprehensible. Above all, however, it is deeply troubling. And, as the book explains, the continuous invention of new types of funds – including the now ubiquitous money market mutual funds and increasingly popular exchange-traded funds – does not necessarily help to fix the underlying problems in how the fund industry operates.

Birdthistle closes the book by offering a brilliantly simple and potentially effective cure for America’s visibly ailing retirement saving system. He proposes allowing all individuals to invest their savings through the federally-run Thrift Savings Plan (“TSP”), currently available only to federal government employees. As a former federal employee with a (very) small TSP retirement account, I was immediately intrigued by this proposal: isn’t it odd to channel everyone’s retirement savings into this boringly simple, low-risk, and incredibly low-cost investment vehicle? What about the great capitalist ideal of one’s “freedom” to invest in super-fancy, super-diversified, super-risk-sensitive products sold by expensive investment professionals in the private sector? Birdthistle’s answer is disarmingly simple and undeniably correct: individual savers can never enjoy real freedom in a system that is built to favor self-interested fund managers. To regain freedom, individual investors have to alter the structural balance of power: they have to increase their collective bargaining power by pooling their economic strength – and to do so via a publicly-controlled investment vehicle.

Perhaps unsurprisingly, I like this solution for two main reasons. First, it is explicitly structural, rather than narrowly transactional or disclosure-oriented (a low-hanging fruit in many situations). Second, it embraces and emphasizes the critical role of public instrumentalities in making modern finance not only more fair and democratic but also more efficient. As Birdthistle notes in response to predictable criticisms, “The private sector should certainly be able to do something similar to TSP, but it hasn’t.” There is a reason why it hasn’t: private fund managers’ primary incentive is to maximize their own profits, even where it is directly at odds with the overarching public interest in providing a reliable retirement savings system. And it is the same reason why we, the investing public, must step in and take control of our savings.

Whether or not this can or will be done in the near future is anybody’s guess. But maybe there is hope, especially if people on Capitol Hill hurry up and read Professor Birdthistle’s wonderfully insightful and extremely accessibly written book. I certainly hope they do.

Cite as: Saule T. Omarova, Saving America’s Future From the Way We Save Now, JOTWELL (January 26, 2018) (reviewing William A. Birdthistle, Empire of the Fund: The Way We Save Now (2016)),

A New Look at the Theory of the Firm

Tamara Belinfanti & Lynn A. Stout, Contested Visions: The Value of Systems Theory for Corporate LawU. Pa. L. Rev. (forthcoming 2017), available at SSRN.

Tamara Belinfanti and Lynn Stout’s Contested Visions: The Value of Systems Theory for Corporate Law, forthcoming in the University of Pennsylvania Law Review, brings systems theory to the theory of the firm. I picked the paper up expecting a cross-disciplinary reference to the work of Niklas Luhmann and other social theorists. But the reference here is to another branch of the systems inquiry, the cross-referents of which go to engineering, biology, and computer, environmental and management science. Belinfanti and Stout include a succinct and lucid primer of the basic points. They then deploy them against the most important point in the quadripartite case for shareholder value as the purpose of the firm.

A little law and economics background needs to be provided to show the importance of the intervention. Microeconomics does not yield shareholder value maximization as the purpose of the firm as a primary proposition. Indeed, in a frictionless world with complete markets, optimality would mean maximizing the yield to every actor connected to the firm rather than just the yield to the shareholders. Shareholder primacy emerges once frictions and incomplete markets are interpolated. It follows from four more particular assertions: first, an instruction to maximize for multiple constituents would be incoherent; second, the shareholder interest, as the residual interest, points management in the most productive direction; third, the shareholders are vulnerable, relatively speaking, because other firm constituents can protect themselves with contracts; and, fourth, a multiple constituent model would lack yardsticks with which to measure management performance, where the shareholder model can measure performance with standard metrics like the stock price and periodic earnings.

Three of the four legs that thus support the shareholder primacy table are looking shaky. The first justification—governance incoherence—never did a lot of work. To rebut it, all one needs to do is follow the doctrine and direct management’s duties to the enterprise and then take a confirming look across the Atlantic to large German companies with dual boards. The second and third justifications—shareholder incentive alignment and shareholder vulnerability—have lost cogence as shareholder power has waxed in recent years. With short-termist hedge funds now taking the lead as shareholder value shock troops, shareholder incentives are no less problematic than anyone else’s. Nor do shareholders any longer stand out as a vulnerable constituency. Indeed, the remission of other constituents to contractual protection never did resonate very well in world dominated by at will employment contracting.

This leaves shareholder advocates with only a single powerful justification—the point that shareholder-directed metrics like the stock price and periodic earnings provide the only workable yardsticks with which to evaluate management performance. In a multiple-constituency firm without these focal points, it is said, self-serving managers would hide behind vaguely defined constituency interests with negative effects on productivity. There is much to be said for this point.

Belinfanti and Stout push back against it, drawing on systems theory’s account of interconnected processes. No silver bullet metric emerges. Indeed, in the authors’ description, the whole point of systems theory is that things are way too complicated to yield such a metric. What we get instead are multiple indicators, all directed toward the measurement of the system’s health and sustainability. A warning emerges in cumulative picture that results—excess emphasis on shareholder concerns can cause systemic damage.

I did not finish the paper persuaded that systems theory provides a viable basis with which to discipline management in a multiple constituency firm. But I am thinking about it. Meanwhile, this thought-provoking essay is the most constructive intervention on the constituents’ behalf in a long, long time.

Cite as: Bill Bratton, A New Look at the Theory of the Firm, JOTWELL (November 24, 2017) (reviewing Tamara Belinfanti & Lynn A. Stout, Contested Visions: The Value of Systems Theory for Corporate LawU. Pa. L. Rev. (forthcoming 2017), available at SSRN),