Constitutions constitute a polity and create and entrench power. A corporate constitution - the governance choices incorporated in state law and the certificate of incorporation - resembles a political constitution. Delaware law allows parties to create corporations, to endow them with perpetual life, to assign rights and duties to "citizens" (directors and shareholders), to adopt a great variety of governance structures, and to entrench those choices.In this Article, we argue that the decision to endow directors with significant power over decisions whether and how to sell the company is a constitutional choice of governance structure. We then argue that it is, on theoretical and empirical grounds, a perfectly intelligible choice: shareholders reasonably might opt for board entrenchment - implemented, for example, by means of a staggered board - in order to enable a board to employ selling strategies more effectively and thus to increase the premium shareholders receive when the company is sold. Such a decision is a kind of pre-commitment whereby shareholders, by binding themselves ex ante, may be able to improve their collective position ex post.After examining how shareholders can entrench particular governance structures under Delaware law, we examine two issues that arise once shareholders have chosen to entrench a governance structure: the question of incomplete implementation that arises in cases such as Blasius and Liquid Audio; and the questions when and whether changed circumstances justify ex post judicial negation of shareholders' prior commitments.
{"title":"Corporate Constitutionalism: Antitakeover Charter Provisions as Precommitment","authors":"Marcel Kahan, Edward B. Rock","doi":"10.2139/ssrn.416605","DOIUrl":"https://doi.org/10.2139/ssrn.416605","url":null,"abstract":"Constitutions constitute a polity and create and entrench power. A corporate constitution - the governance choices incorporated in state law and the certificate of incorporation - resembles a political constitution. Delaware law allows parties to create corporations, to endow them with perpetual life, to assign rights and duties to \"citizens\" (directors and shareholders), to adopt a great variety of governance structures, and to entrench those choices.In this Article, we argue that the decision to endow directors with significant power over decisions whether and how to sell the company is a constitutional choice of governance structure. We then argue that it is, on theoretical and empirical grounds, a perfectly intelligible choice: shareholders reasonably might opt for board entrenchment - implemented, for example, by means of a staggered board - in order to enable a board to employ selling strategies more effectively and thus to increase the premium shareholders receive when the company is sold. Such a decision is a kind of pre-commitment whereby shareholders, by binding themselves ex ante, may be able to improve their collective position ex post.After examining how shareholders can entrench particular governance structures under Delaware law, we examine two issues that arise once shareholders have chosen to entrench a governance structure: the question of incomplete implementation that arises in cases such as Blasius and Liquid Audio; and the questions when and whether changed circumstances justify ex post judicial negation of shareholders' prior commitments.","PeriodicalId":377417,"journal":{"name":"University of Pennsylvania Carey Law School","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2003-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127915612","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 explores the links between a country's venture capital industry, the location of the IPO exit option and U.S. securities regulation. I argue that one observes two interestingly different models of IPO exit: the Taiwan model in which IPO exit is on the domestic stock exchange; and the Israeli model in which IPO exit is on the NASDAQ. For countries that choose or end up with the NASDAQ exit route, U.S. securities regulation facilitates the process in an interesting but little noted way. By drawing a distinction between "U.S. issuers" and "foreign private issuers," and by imposing reduced disclosure obligations on the latter, the regulatory structure provides a clean way of self identifying as an American company, even when the company's main centers of activity are off-shore. As I detail, Israeli venture capital fueled companies take full advantage of this regulatory option and are viewed by the investor community as regular, Silicon Valley technology companies.
{"title":"Coming to America? Venture Capital, Corporate Identity and U.S. Securities Law","authors":"Edward B. Rock","doi":"10.2139/SSRN.313419","DOIUrl":"https://doi.org/10.2139/SSRN.313419","url":null,"abstract":"This article explores the links between a country's venture capital industry, the location of the IPO exit option and U.S. securities regulation. I argue that one observes two interestingly different models of IPO exit: the Taiwan model in which IPO exit is on the domestic stock exchange; and the Israeli model in which IPO exit is on the NASDAQ. For countries that choose or end up with the NASDAQ exit route, U.S. securities regulation facilitates the process in an interesting but little noted way. By drawing a distinction between \"U.S. issuers\" and \"foreign private issuers,\" and by imposing reduced disclosure obligations on the latter, the regulatory structure provides a clean way of self identifying as an American company, even when the company's main centers of activity are off-shore. As I detail, Israeli venture capital fueled companies take full advantage of this regulatory option and are viewed by the investor community as regular, Silicon Valley technology companies.","PeriodicalId":377417,"journal":{"name":"University of Pennsylvania Carey Law School","volume":"34 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2002-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114268341","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 contends that, contrary to its present use in the securities fraud realm as sanctioned by the Supreme Court and as assumed to be correct by most commentators, the CAPM is irrelevant for measuring damages in Rule 10b-5 cases because the CAPM is not designed to measure what stock prices would have been if the requisite fraud had not occurred. Instead, the CAPM is designed to help investors and portfolio managers determine optimal asset portfolios. That is, the CAPM is designed to help people make decisions about assets with uncertain future returns, rather than to analyze the actual past returns of assets in a manner that would allow for the measurement of damages pursuant to Rule 10b-5.This Article further asserts that the legal community should, in the context of the measurement of damages in Rule 10b-5 cases, reject the use of empirical derivations of the CAPM, and, in its place, use more accurate models designed to analyze past asset performance. In attacking the very foundations of the present methodology for calculating securities fraud damages, Part I of this Article reviews Rule 10b-5 and the basic methodology of calculating damages in Rule 10b-5 cases. Part II examines the intersection of judicial theory and capital market theory by considering the fraud-on-the-market doctrine and the capital market theories under which the doctrine and the measurement of damages may be justified: the Efficient Capital Markets Hypothesis, systematic risk compensation and the Capital Asset-Pricing Model. Part III contrasts the forward-looking basis of the CAPM with the historical basis for Rule 10b-5 damages. As Part III illustrates, whereas the CAPM approach calculates the historical relationship between stock price and the Standard & Poor's 500 Index (“S&P 500 Index” or “S&P 500”) and then projects the relationship forward to the period of the fraud, the technique we employ recognizes that it is erroneous to discount or ignore other factors besides movements in the S&P 500 Index that might actually have an even more powerful causal impact on a relevant security's price. Part IV introduces an alternative to the CAPM for damage measurement, utilizing the principles of arbitrage pricing theory. Finally, Part V surveys an empirical study that compares the ability of the CAPM with other derivative methods to explain the returns of common stocks and also introduces our own empirical study -- one that is clearly superior to the CAPM's derivatives for measuring Rule 10b-5 damages.
{"title":"Solving a Profound Flaw in Fraud-on-the-Market Theory: Utilizing a Derivative of Arbitrage Pricing Theory to Measure Rule 10b-5 Damages","authors":"E. Adams, D. Runkle","doi":"10.2307/3312664","DOIUrl":"https://doi.org/10.2307/3312664","url":null,"abstract":"This Article contends that, contrary to its present use in the securities fraud realm as sanctioned by the Supreme Court and as assumed to be correct by most commentators, the CAPM is irrelevant for measuring damages in Rule 10b-5 cases because the CAPM is not designed to measure what stock prices would have been if the requisite fraud had not occurred. Instead, the CAPM is designed to help investors and portfolio managers determine optimal asset portfolios. That is, the CAPM is designed to help people make decisions about assets with uncertain future returns, rather than to analyze the actual past returns of assets in a manner that would allow for the measurement of damages pursuant to Rule 10b-5.This Article further asserts that the legal community should, in the context of the measurement of damages in Rule 10b-5 cases, reject the use of empirical derivations of the CAPM, and, in its place, use more accurate models designed to analyze past asset performance. In attacking the very foundations of the present methodology for calculating securities fraud damages, Part I of this Article reviews Rule 10b-5 and the basic methodology of calculating damages in Rule 10b-5 cases. Part II examines the intersection of judicial theory and capital market theory by considering the fraud-on-the-market doctrine and the capital market theories under which the doctrine and the measurement of damages may be justified: the Efficient Capital Markets Hypothesis, systematic risk compensation and the Capital Asset-Pricing Model. Part III contrasts the forward-looking basis of the CAPM with the historical basis for Rule 10b-5 damages. As Part III illustrates, whereas the CAPM approach calculates the historical relationship between stock price and the Standard & Poor's 500 Index (“S&P 500 Index” or “S&P 500”) and then projects the relationship forward to the period of the fraud, the technique we employ recognizes that it is erroneous to discount or ignore other factors besides movements in the S&P 500 Index that might actually have an even more powerful causal impact on a relevant security's price. Part IV introduces an alternative to the CAPM for damage measurement, utilizing the principles of arbitrage pricing theory. Finally, Part V surveys an empirical study that compares the ability of the CAPM with other derivative methods to explain the returns of common stocks and also introduces our own empirical study -- one that is clearly superior to the CAPM's derivatives for measuring Rule 10b-5 damages.","PeriodicalId":377417,"journal":{"name":"University of Pennsylvania Carey Law School","volume":"87 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"1997-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116085497","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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