December 3 : November 25 : August 7 : July 10 : June
20 : May 29 : May
24 : April 26 : April
17 : March 14 : March 5
: January 21 : January
December 3, 2002
- The Washington
Legal Foundation has published a useful "backgrounder"
on regulation of the off-balance sheet special purpose entities
that got Enron in so much trouble: In Defense Of Moderation: Avoiding
Overregulation Of "Special Purpose Entities." Click HERE
Press has just published a new book on federalism issues
in corporate law by Yale law professor Roberta Romano: The
Advantage of Competitive Federalism for Securities Regulation.
Romano is a leading proponent of the so-called race to the top
hypothesis. As many readers of this website will know, former
SEC Chairman William Cary popularized the so-called "race to the
bottom." Cary and many subsequent corporate and social reformers
believed that the states competed in granting corporate charters.
After all, the more charters (certificates of incorporation) the
state grants, the more franchise and other taxes it collects.
According to this view, because it is corporate managers who decide
on the state of incorporation, states compete by adopting statutes
allowing corporate managers to exploit shareholders. Many legal
scholars reject the race to the bottom hypothesis. According to
a standard account, investors will not purchase, or at least not
pay as much for, securities of firms incorporated in states that
cater too excessively to management. Lenders will not make loans
to such firms without compensation for the risks posed by management's
lack of accountability. As a result, those firms' cost of capital
will rise, while their earnings will fall. Among other things,
such firms thereby become more vulnerable to a hostile takeover
and subsequent management purges. Corporate managers therefore
have strong incentives to incorporate the business in a state
offering rules preferred by investors. Competition for corporate
charters thus should deter states from adopting excessively pro
management statutes. The empirical research appears to bear out
this view of state competition, suggesting that efficient solutions
to corporate law problems win out over time. In recent years,
however, some prominent legal scholars have revived and defended
the race to the bottom hypothesis. In this excellent text, Romano
defends the race to the top hypothesis. She then expands the scope
of argument from corporate governance to securities regulation,
arguing that the SEC should adopt what she calls competitive federalism.
Under this system, firms select a regulator from among the states,
the SEC, or even other nations. Romano asserts that competitive
federalism harnesses the high-powered incentives of markets to
the regulatory state to produce regulatory arrangements compatible
with investors' preferences. Firms will locate in the domicile
investors prefer so as to reduce the cost of capital, and states
will have financial incentives, such as incorporation and registration
fees, to adapt their securities regimes to firms' domicile decisions.
November 25, 2002
- The Heritage Foundation's annual index of economic freedom is
now available. Click HERE
to access it.
- The National Center for Policy Analysis has a page on the Benefits
of U.S. Corporate Bankruptcy Laws. Please click HERE
- A recent Cato Institute briefing paper argues that "Corporate
Accounting: Congress and FASB Ignore Business Realities. Click
HERE to read.
- On October 3d, practice group member George Terwillinger spoke at an event sponsored by
The Federalist Society Boston Lawyers Chapter and The Pioneer Institute regarding "Corporate Accountability in a Post-Enron Environment."
- On October 18, practice group member Stephen Bainbridge spoke on "Sarbanes-Oxley and the Creeping Federalization of Corporate Law" at a Federalist Society student chapter at Gonzaga University School of Law.
August 7, 2002
- The Federalist Society's Corporate Responsibility Project website
is now operational. It contains a number of position papers and
analyses by Practice Group members relating to various aspects
of the current corporate governance "scandals." Click HERE
to visit the Project.
Corporations Practice Group E-communications Vice-Chair Stephen
Bainbridge (Professor, UCLA School of Law) has just published
Corporation Law and Economics (Foundation Press 2002). This 800+-page
treatise provides a comprehensive overview of corporation law
from a law and economics perspective. Click HERE
for more information.
July 10, 2002
- The White House's web site has a useful new portal, detailing
the President's response to the on-going corporate governance
"crisis." It contains links to the administration's
policy proposals, the President's recent speech, and other useful
documents. Click HERE
to check it out.
The Heritage Foundation has put out a short position paper by
David C. John critiquing the various corporate governance proposals
pending on the Hill. Click HERE
to read it.
June 21, 2002
- Under the New York Stock Exchange's (NYSE) aegis, a blue ribbon
panel has proposed new listing standards that would, inter alia,
significantly increase the role of independent directors in public
corporations. To read the report, click HERE.
Professor Stephen Bainbridge of UCLA has written a white paper
critical of the NYSE's conclusions.
June 20, 2002
- Richard Painter, Megan Farrell, and Scott Adkins, have prepared
a white paper on the continuing need for the PSLRA in the post-Enron
environment. Among their more important findings are: (1) that
the "courthouse door ... remains wide open for plaintiffs"; (2)
"that settlement amounts are higher now than they were before
the PSLRA": and (3) "market concentration among the plaintiffs'
bar has grown significantly since the PSLRA, with one law firm
[Milberg, Weiss] now accounting for over half of securities class
action litigation." See "Private
Securities Litigation Reform Act: A Post-Enron Analysis."
May 29, 2002
- The following are articles about the accounting bill that was
halted temporarily. Here are three articles, there are more articles
in the NY Times, Washington Post, and BNA.
Sarbanes Delays Action on Accounting Reform Bill. The Wall Street
Journal (5/21, Hitt) reports, "The chairman of the Senate Banking
Committee has put off action on a sweeping overhaul of accounting
practices, hoping to buy time to develop a consensus on the Enron
Corp.-inspired package." Sen. Paul Sarbanes (D., Md.) "had planned
to move forward with the bill on Tuesday, but encountered splintered
support. More than 120 amendments were filed against the bill
by Friday, reflecting opposition from Republicans as well as from
some Democrats. Consumer and business groups are also divided."
Sarbanes "agreed to a request by Texas Sen. Phil Gramm, the committee's
top-ranking Republican, to defer action in the hopes of developing
a bipartisan bill." Sen. Sawbones's spokesman Jesse Jacobs said,
"We're going to work through this and see if we can accommodate
some of the issues that are out there." A Gramm spokeswoman "said
the Texas Republican 'remains eager to work; on a bill that 'will
receive the broad bipartisan support of the committee.' If the
gambit works, committee aides said, it will boost prospects for
passage on the Senate floor."
FINANCE -Congress Daily Delay In Senate Accounting Reform Bill
Hailed, Assailed Senate Banking Chairman Sarbanes' decision to
postpone a markup on Enron-inspired accounting reform legislation
until after the Memorial Day recess came amid criticism Monday
by both likely and unlikely sources. Although it had no official
comment on the markup's postponement, the American Institute of
Certified Public Accountants has openly criticized the panel print
unveiled by Sarbanes last week. But so, too, has the U.S. Chamber
of Commerce, which issued a statement Monday, shortly before the
postponement was announced. "While being touted as an 'Enron reform
bill,' such overreaching legislation will raise costs, promote
confusing and duplicative regulation and encourage frivolous lawsuits,"
Chamber President and CEO Thomas Donohue said in a letter to senators.
The bill also elicited criticism from another unexpected source,
the Council of Citizens Against Government Waste, which called
the committee print a "radical proposal" that would "create an
entirely new, and duplicative, federal bureaucracy and legislate
a government takeover of the accounting profession's standards
board." The AeA, the nation's largest high-tech trade association,
also strongly opposes the pending accounting legislation and was
working on a letter to that effect as of late Monday, an AeA spokeswoman
confirmed. A spokesman said Sarbanes had reconsidered holding
the markup, originally scheduled for today, after receiving a
request to do so from Senate Banking ranking member Phil Gramm,
R-Texas, and seeing the mountain of amendments filed by committee
members - a sizable portion of which Gramm had filed. However,
legislative observers speculated that Sarbanes also is facing
some divisions among Democratic senators on his committee. The
delay - and the ideological dispute that has given rise to it
-raised questions about whether the Senate can reach a consensus
and complete action on the complex measure with time left before
the end of the session for a conference committee with the House.
Frank Torres of Consumers Union harshly criticized Banking Committee
Republicans and the industry representatives, saying their actions
constituted a "behind-the-scenes effort to derail this bill."
Torres also criticized the Republican substitute that Gramm and
Sen. Michael Enzi, R-Wyo., planned to offer as a "sham measure,"
saying it is "much weaker than the paltry accounting bill approved
by the House." A spokeswoman for House Financial Services Chairman
Oxley, who sponsored the House-passed accounting bill, applauded
Sarbanes for seeking consensus among senators. But she noted that
"significant differences" currently exist between the House and
Senate bills. "Our advice for them is to leave some time for a
conference," she said. By Pamela Barnett
CQ MONITOR NEWS INDUSTRY & REGULATION Markup of Accounting Measure
Delayed as Members Weigh In By Keith Perine, CQ Staff Writer May
20, 2002 - Tuesday's scheduled markup of draft legislation to
overhaul the way the government regulates the accounting industry
was postponed after Senate Banking Committee Chairman Paul S.
Sarbanes was deluged with proposed amendments by both Republicans
and Democrats who want to put their own stamp on the committee's
response to the Enron Corp. collapse. A terse one-sentence press
release Monday announced that the markup "has been put over until
after the Memorial Day recess at a time to be determined." Last
week, Phil Gramm of Texas, the committee's ranking Republican,
gave Sarbanes a list of dozens of questions about the draft and
asked him to postpone the markup in favor of a hearing. By Friday,
the committee had received 123 amendments, committee aides said.
The Sarbanes draft proposal would establish a new public oversight
board and give it broad new powers to police the accounting industry.
Among other provisions, the draft contains so-called "auditor
independence" language that would bar accounting firms from providing
public company audit clients with many consulting services, including
bookkeeping, internal audits and investment banking services.
It also would require audit partners at accounting firms to rotate
every five years. The draft would require chief executives and
chief financial officers of public companies to attest in writing
to the accuracy of company materials contained in audit reports
filed to the Securities and Exchange Commission. Groups in Opposition.
The American Institute of Certified Public Accountants, the accounting
industry's main trade group, has asked its members to write letters
in opposition to Sarbanes´ draft. The U.S. Chamber of Commerce
blanketed the Senate on Monday with a letter opposing Sarbanes´
bill. The Business Roundtable, an association of corporate chief
executives, sent a letter to Sarbanes in which it objected to
several provisions. Gramm and Sen. Michael B. Enzi, R-Wyo., have
been circulating their own, more limited draft proposal. Another,
more limited measure (HR 3763) passed the House 334-90 on April
24. Sarbanes held 10 hearings to examine accounting regulation
and corporate governance earlier this year, but did not publicly
unveil his draft proposal until May 8. Now, the ever-shrinking
legislative calendar gives Sarbanes little time to move a bill
through his committee, the full Senate, and what would be a contentious
House-Senate conference before the end of this year's session.
May 24, 2002
- The Corporations Practice Group will hold its Corporate Governance
Conference on Thursday, June 13 in New York City. This day-long
conference will examine the effectiveness of the traditional corporate
governance structure, as well as suggestions for improvements;
the need for investor confidence and its impact on capital generating
ventures; the expansion of the scope of prosecutions as a result
of criminalizing corporate behavior; and the role of independent
auditors in providing independent review and in ensuring investor
confidence. CLE credit will be available. Click HERE
for more information or to register.
- Stanford Law Professor Joseph Grundfest has prepared an interesting
white paper on Enron for the Federalist Society. Access it by
April 26, 2002
- John S. Baker examines the indictment of corporations, using
Arthur Andersen as an example, in The Wall Street Journal
Aren't Criminals," (PDF format) published April 22,
April 17, 2002
- It now appears increasingly likely that Congress will give the
SEC significantly expanded powers to bar individuals from serving
as corporate directors and officers.
CLICK HERE to read the Washington Post article.
If adopted, this proposal will mark a substantial extension of
the Federal role into areas of corporate governance traditionally
within the purview of state corporation law. States have been
in the business of regulating corporate governance since before
the United States was founded. Throughout that same time span,
many have argued for federalizing corporate law. Yet, the federal
government did not enter the picture until the New Deal securities
legislation of the 1930s and 1940s. Moreover, when Congress finally
did get involved, it did so in a fairly limited way. Congress
was mainly concerned with disclosure and with providing procedural
safeguards to make the disclosure requirements more effective.
In a long line of cases, the Supreme Court has respected the balance
created by Congress by holding that the federal securities laws
merely place a limited gloss on state corporate law. E.g., Kamen
v. Kemper Fin. Servs. Inc., 502 U.S. 974 (1991); Burks
v. Lasker, 441 U.S. 471 (1979); Santa Fe Indus., Inc. v.
Green, 430 U.S. 462 (1977); Piper v. Chris-Craft Indus.,
Inc., 430 U.S. 1 (1977); Cort v. Ash, 422 U.S. 66 (1975).
Unless federal law expressly governs some corporate law question,
the court will treat state law as controlling. Cort v. Ash,
422 U.S. 66, 84 (1975). The corporation thus is recognized as
a creature of the state, "whose very existence and attributes
are a product of state law." CTS Corp. v. Dynamics Corp. of
Am., 481 U.S. 69, 89 (1987). The court therefore acknowledges
that states have legitimate interests in overseeing the firms
they create and in protecting the shareholders of their corporations.
Finally, the CTS court further accepted a state's "interest in
promoting stable relationships among parties involved in the corporations
it charters, as well as in ensuring that investors in such corporations
have an effective voice in corporate affairs." If so, state regulation
not only protects shareholders, but also protects investor and
entrepreneurial confidence in the fairness and effectiveness of
the state corporation law.
The country as a whole benefits from state regulation in this
area, as well. The markets that facilitate national and international
participation in ownership of corporations are essential for providing
capital not only for new enterprises but also for established
companies that need to expand their businesses. This beneficial
free market system depends at its core upon the fact that corporations
generally are organized under, and governed by, the law of the
state of their incorporation. CTS Corp. v. Dynamics Corp. of
Am., 481 U.S. 69, 90 (1987). This is so in large part because
ousting the states from their traditional role as the primary
regulators of corporate governance would eliminate a valuable
opportunity for experimentation with alternative solutions to
the many difficult regulatory problems that arise in corporate
law. As Justice Brandeis pointed out many years ago, "It is one
of the happy incidents of the federal system that a single courageous
State may, if its citizens choose, serve as a laboratory; and
try novel social and economic experiments without risk to the
rest of country." New State Ice Co. v. Liebmann, 285 U.S.
262, 311 (1932) (Brandeis, J., dissenting). So long as state legislation
is limited to regulation of firms incorporated within the state,
as it generally is, there is no risk of conflicting rules applying
to the same corporation. Experimentation thus does not result
in confusion. In contrast, a uniform federal standard would preclude
experimentation with differing modes of regulation.
March 14, 2002
- Law Professor Richard Painter has organized a group that is
sending a letter to SEC Chairman Harvey Pitt in which the signatories
raise the question of "whether lawyers should inform a client
corporation's directors about violations of the securities laws."
The letter's authors contend "that, if senior management
will not rectify a violation, lawyers who are responsible for
the corporation's securities compliance work should be required
to make such a report." Signatories include Painter and about
20 other prominent law professors, such as Roger Cramton (Cornell),
William Simon (Stanford), Geoffrey Miller (NYU), Joel Seligman
(Washington University), Geoffrey Hazard (Penn), Stephen Gillers
(NYU), Reinier Kraakman (Harvard), and Stephen Bainbridge (UCLA).
Interested persons should contact Professor Painter at the University
of Illinois Urbana-Champaign College of Law. mailto:firstname.lastname@example.org.
To read the letter, CLICK
- The House has passed (by 233-190) significant class action reform
March 5, 2002
- The Silicon Valley Chapter hosted a very timely presentation
on the Enron matter featuring Stanford Law Professor and former
SEC Commissioner Joseph Grundfest. In his presentation, Professor
Grundfest offered a reform strategy that would require accounting
firms to disclose material information beyond GAAP. As a way of
fostering further debate and discussion, we've included the Grundfest
proposal here: http://www.fed-soc.org/Publications/White%20Papers/enron.htm.
It raises many interesting issues, including: the proper disclosure
standard (and the timing of such disclosures), and the appropriate
balance between civil/private actions against accountants versus
government/criminal enforcement activity.
- Practice group members who have prepared other materials on
the Enron matter, which they would like to bring to the notice
of the group at large, may forward their materials to E-Communications
Vice-Chairman Stephen Bainbridge at mailto:email@example.com
February 20, 2002
- Enron fallout may lead to securities fraud "reform."
In the aftermath of the Enron bankruptcy, several bills are being
prepared to repeal or amend key provisions of the Private Securities
Litigation Reform Act. Support for such a move is suggested by
a February 15, 2002 press release (available on-line), in which
the Consumers Union and Consumer Federation of America claimed
"that the Private Securities Litigation Reform Act (PSLRA)
may have helped pave the way for the Enron disaster." See:
- The Cato Institute has published an interesting and important
book on . According to Cato: "The Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac), which are called government-sponsored enterprises
(GSEs) because of their government backing, are supposed to use
that government support to reduce interest rates in the home mortgage
market. But as shareholder-owned companies, they are also supposed
to maximize their profits. This creates what [AEI resident fellow
Peter J.] Wallison calls 'two ultimately irreconcilable roles':
Fannie Mae and Freddie Mac are now trying to serve both their
shareholders, with high profits, and the home-buying public, with
reduced interest rates. They obviously cannot do both." http://www.aei.org/bs/bs13393.htm
- The Heritage Foundation has released an interesting research
paper by David C. John on moving Social Security to individual
investment accounts. You can download it here: http://www.heritage.org/library/backgrounder/bg1512.html
- Villanova University School of Law is sponsoring a conference
on "Religion and Investing" on April 6, 2002. Speakers
include several conservatives, including Stephen Bainbridge of
the UCLA School of Law and Dr. Samuel Gregg of the Acton Institute
of the Study of Religion and Liberty. For information contact:
January 21, 2002
Statement by SEC Chairman: Regulation of the Accounting Profession
- Directors and Boards recently reprinted a speech by T.J.
Dermot Dunphy, the retired CEO of Sealed Air Corp., originally
delivered at the 2000 Corporate Governance Conference. Dunphy
calls for "an atmosphere in which CEOs who believe in shareholder
democracy are the norm rather than the exception." Click
to read his remarks.
January 11, 2002
- E-communications Vice-Chair Professor Stephen Bainbridge (UCLA
School of Law) solicits noteworthy items for inclusion in our
practice group web site. If there are recent legislative or regulatory
developments, recent cases, newly issued studies or reports, or
the like that you believe would be of interest to our membership,
please send brief item descriptions to Professor Bainbridge at
Bullet points with links to web materials will be especially useful.
- The November 2001 issue of ENGAGE, The Journal of the
Federalist Society's Practice Group, contains a transcript of
a panel discussion on "The Regulation of HighTech Industries:
Private Ordering or Government Oversight" (pages 32-40).
- The Federal Trade Commission and U.S. Department of Justice
have announced a series of joint hearings, beginning in January
2002, to examine the balance between protection of intellectual
property rights and enforcement of the antitrust laws. A description
of the planned hearings is available on-line at: http://www.ftc.gov/opa/2001/11/iprelease.htm
- The fallout from Enron's demise continues in Washington. President
Bush has directed Treasury, the SEC, the CFTC, and the Fed to
convene a working group to analyze corporate disclosure rules
and regulations. The announcement is available on-line: http://www.whitehouse.gov/news/releases/2002/01/20020110-1.html
- In his capacity as chairman of the Governmental Affairs Committee,
Senator Lieberman has announced plans to conduct committee hearings
into the Enron failure. http://www.senate.gov/~lieberman/press/01/01/2002102713.html
- E-communications Vice-Chair Professor Stephen Bainbridge is
the co-author of a new casebook, "Agency, Partnership, and
Limited Liability Companies: Cases and Materials on Unincorporated
Business Associations," published by Foundation Press (2001).