Despite a longstanding debate over the pros and cons of imposing legal liability on directors and officers (D&Os), how D&O liability affects corporate innovation is rarely studied. We study this question by exploiting Nevada’s 2001 corporate law change that dramatically lowered D&O legal liability and helped Nevada become the second most popular state for out-of-state incorporations. We find that firms incorporated in Nevada exhibit an increase in innovation outputs relative to matched control firms after the law change, particularly for firms facing higher litigation risk or operating in more innovative industries. The results are mainly driven by exchange-listed firms that are subject to better governance than over-the-counter (OTC) listed firms. Lower D&O liability also enables firms to pursue more risky, but potentially more rewarding, explorative innovation. Therefore, while holding D&Os liable may be overall desirable as prior studies suggest, it also entails a cost by discouraging innovation in some firms.
{"title":"Managerial Liability and Corporate Innovation: Evidence from a Legal Shock","authors":"Yuyan Guan, Liandong Zhang, Liu Zheng, H. Zou","doi":"10.2139/ssrn.3070160","DOIUrl":"https://doi.org/10.2139/ssrn.3070160","url":null,"abstract":"Despite a longstanding debate over the pros and cons of imposing legal liability on directors and officers (D&Os), how D&O liability affects corporate innovation is rarely studied. We study this question by exploiting Nevada’s 2001 corporate law change that dramatically lowered D&O legal liability and helped Nevada become the second most popular state for out-of-state incorporations. We find that firms incorporated in Nevada exhibit an increase in innovation outputs relative to matched control firms after the law change, particularly for firms facing higher litigation risk or operating in more innovative industries. The results are mainly driven by exchange-listed firms that are subject to better governance than over-the-counter (OTC) listed firms. Lower D&O liability also enables firms to pursue more risky, but potentially more rewarding, explorative innovation. Therefore, while holding D&Os liable may be overall desirable as prior studies suggest, it also entails a cost by discouraging innovation in some firms.","PeriodicalId":213285,"journal":{"name":"CGN: Corporate Law Litigation (Sub-Topic)","volume":"16 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126958355","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This Article analyzes the current Circuit split about the interpretation of the “personal benefit” test, which defines the scope of insider trading liability for tippees. In United States v. Newman, the Second Circuit held that, in order to satisfy the personal benefit test, the tipper and tippee must have a “meaningfully close personal relationship that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” In United States v. Salman, the Ninth Circuit rejected this test. The Supreme Court granted certiorari in Salman, and this Article seeks to provide guidance to the Court. First, this Article argues that Newman’s stringent personal benefit test is within the borders of Dirks v. SEC, the case in which the Court first pronounced the personal benefit test. Second, this Article examines the positive and negative effects of a more stringent personal benefit test. Finally, drawing therefrom, this Article recommends the adoption of the Newman personal benefit test. Somewhat ironically, the outcome in Salman would likely be the same under Newman because a pecuniary gain can be inferred from a familial relationship. Beyond Salman, however, adopting the Newman test would protect securities analysts and other distant acquaintances from unwarranted insider trading prosecution.
{"title":"Friends and Benefits: Why Newman's Stringent Personal Benefit Test Should Be Adopted","authors":"Chris Schrette","doi":"10.2139/SSRN.2740063","DOIUrl":"https://doi.org/10.2139/SSRN.2740063","url":null,"abstract":"This Article analyzes the current Circuit split about the interpretation of the “personal benefit” test, which defines the scope of insider trading liability for tippees. In United States v. Newman, the Second Circuit held that, in order to satisfy the personal benefit test, the tipper and tippee must have a “meaningfully close personal relationship that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” In United States v. Salman, the Ninth Circuit rejected this test. The Supreme Court granted certiorari in Salman, and this Article seeks to provide guidance to the Court. First, this Article argues that Newman’s stringent personal benefit test is within the borders of Dirks v. SEC, the case in which the Court first pronounced the personal benefit test. Second, this Article examines the positive and negative effects of a more stringent personal benefit test. Finally, drawing therefrom, this Article recommends the adoption of the Newman personal benefit test. Somewhat ironically, the outcome in Salman would likely be the same under Newman because a pecuniary gain can be inferred from a familial relationship. Beyond Salman, however, adopting the Newman test would protect securities analysts and other distant acquaintances from unwarranted insider trading prosecution.","PeriodicalId":213285,"journal":{"name":"CGN: Corporate Law Litigation (Sub-Topic)","volume":"42 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-02-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121552632","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Conventional wisdom has long held that leadership decisions in corporate litigation are best left to the lawyers. Even as the world of corporate litigation has changed dramatically, courts have consistently relied on the lawyers themselves to decide who among them will control litigation decisions. As a result, leadership decisions in corporate litigation are almost always made in private negotiations and back-room deals. This Article pulls back the curtain on these decisions, using empirical data to conduct the first in-depth examination into the market for leadership in corporate litigation. This examination reveals a market that bears little resemblance to the ideal imagined by courts and commentators. The reliance on private ordering forces lawyers to agree to overly complicated leadership structures. These structures in turn cause lawyers to underinvest in litigation, encouraging hold-outs and opportunism at the negotiating table. It need not be this way. Other types of complex litigation, from small-scale consumer class actions to multi-district securities class actions, have successfully avoided such problems. The time has come for corporate law to draw on these insights and develop a new market for leadership in corporate litigation. In the end, leadership is far too important to be left to the lawyers.
{"title":"The Market for Leadership in Corporate Litigation","authors":"J. Erickson","doi":"10.31228/osf.io/gp4dx","DOIUrl":"https://doi.org/10.31228/osf.io/gp4dx","url":null,"abstract":"Conventional wisdom has long held that leadership decisions in corporate litigation are best left to the lawyers. Even as the world of corporate litigation has changed dramatically, courts have consistently relied on the lawyers themselves to decide who among them will control litigation decisions. As a result, leadership decisions in corporate litigation are almost always made in private negotiations and back-room deals. This Article pulls back the curtain on these decisions, using empirical data to conduct the first in-depth examination into the market for leadership in corporate litigation. This examination reveals a market that bears little resemblance to the ideal imagined by courts and commentators. The reliance on private ordering forces lawyers to agree to overly complicated leadership structures. These structures in turn cause lawyers to underinvest in litigation, encouraging hold-outs and opportunism at the negotiating table. It need not be this way. Other types of complex litigation, from small-scale consumer class actions to multi-district securities class actions, have successfully avoided such problems. The time has come for corporate law to draw on these insights and develop a new market for leadership in corporate litigation. In the end, leadership is far too important to be left to the lawyers.","PeriodicalId":213285,"journal":{"name":"CGN: Corporate Law Litigation (Sub-Topic)","volume":"70 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-10-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117224984","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The case of Hely Hutchinson v. Brayhead Ltd. till date is taken as authority with regards to actual and ostensible authority in an organisation and liability in terms of employees. In an organisation, is the director an agent? Does he have absolute or actual authority to single-handedly carry out actions with or without consultation from the board of directors or any other such authority? What is the doctrine of estoppel and how is it related to Actual and Ostensible Authority? Are Actual and Ostensible Authority mutually exclusive? What role does the Contract Act play in such situations? These are only a few of the many questions raised in the case. Lord Denning, Lord Pearson and the other Justices have all answered these vital questions in this case, the help of a previous landmark cases like Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd. was taken. This paper consists of enumerable citations of relevant cases which were used in the judgment by the Justices and also are a medium of analyzing viewpoints post Judgment. This case till date is taken as the authority in defining actual authority or ostensible authority in an organisation and it is the sheer quality of the judgment by all the Justices in this case that allows it to remain so especially considering today's context of Company's and their risky elements including the employees. Through this paper, the attempt to answer all these questions has been made and to clearly define what authority in relation to any liability or decision actually is once and for all.
{"title":"Hely Hutchinson v. Brayhead Ltd. - The Authority on Actual and Ostensible Authority","authors":"P. Nanda","doi":"10.2139/SSRN.2229158","DOIUrl":"https://doi.org/10.2139/SSRN.2229158","url":null,"abstract":"The case of Hely Hutchinson v. Brayhead Ltd. till date is taken as authority with regards to actual and ostensible authority in an organisation and liability in terms of employees. In an organisation, is the director an agent? Does he have absolute or actual authority to single-handedly carry out actions with or without consultation from the board of directors or any other such authority? What is the doctrine of estoppel and how is it related to Actual and Ostensible Authority? Are Actual and Ostensible Authority mutually exclusive? What role does the Contract Act play in such situations? These are only a few of the many questions raised in the case. Lord Denning, Lord Pearson and the other Justices have all answered these vital questions in this case, the help of a previous landmark cases like Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd. was taken. This paper consists of enumerable citations of relevant cases which were used in the judgment by the Justices and also are a medium of analyzing viewpoints post Judgment. This case till date is taken as the authority in defining actual authority or ostensible authority in an organisation and it is the sheer quality of the judgment by all the Justices in this case that allows it to remain so especially considering today's context of Company's and their risky elements including the employees. Through this paper, the attempt to answer all these questions has been made and to clearly define what authority in relation to any liability or decision actually is once and for all.","PeriodicalId":213285,"journal":{"name":"CGN: Corporate Law Litigation (Sub-Topic)","volume":"39 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-09-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126773170","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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