Source: https://corp.jotwell.com/
Timestamp: 2019-04-26 08:19:49+00:00

Document:
Ofer Eldar & Andrew Verstein, The Enduring Distinction between Business Entities and Security Interests, 92 S. Cal. L. Rev. __ (forthcoming 2019), available at SSRN.
So when might one be preferable to the other? Eldar and Verstein style the choice as a trade-off between “evaluation costs” and “managerial discretion.” The floating priority associated with business entities will generally appear preferable where one anticipates requiring “flexibility to respond to changing circumstances”—notably, capacity to continue borrowing in the future. The fixed priority associated with security interests, on the other hand, will correlatively appear preferable “when the value of managerial discretion is limited,” and “when debt liquidity is critical”—home mortgages being a straightforward example, reducing evaluation costs and facilitating a secondary market by fixing creditors’ priority.
After examining and rejecting various other potential distinctions, Eldar and Verstein deploy their floating-versus-fixed framework as a means of understanding “three areas of financial innovation” where this distinction might appear to have substantially blurred. In securitization, captive insurance, and mutual funds alike, the predominant U.S. approach involves heavy reliance on “numerous entities,” even though the asset pools are generally constructed “to ensure low evaluation costs and low managerial discretion.” Eldar and Verstein argue that, “in all these financial products, the key structural element is actually a security interest or other law that essentially fixes the priority of the creditors,” and that entities have become critical solely because, in the United States, “security interests are not bankruptcy remote.” In these fields, the proliferation of entities reflects the benefit of insulating the pooled assets they contain from the bankruptcy of a distinct management company, not the need for managerial discretion that would ordinarily render distinct entities attractive.
This insight prompts fascinating comparative points and leads Eldar and Verstein to raise important normative questions that one hopes they will continue to explore in future work. Observing, for example, that a bankruptcy-remote form of security interest under English law has facilitated a form of securitization “without meaningful use of an entity,” they reason that similar availability of a bankruptcy-remote security interest would render distinct entities largely superfluous in U.S. securitization, captive insurance, and mutual fund structures alike, eliminating substantial associated transaction costs. In this light, they further argue that the emergence of “protected cell companies” and the like—permitting more granular partitioning of assets within a single entity—reflects demand for more efficient U.S. structures combining fixed priority with bankruptcy remoteness.
“The law would be improved,” they conclude, “if it respected the bankruptcy remoteness of security interests in such contexts without requiring the interposition of an entity”—at least “where entity-based bankruptcy remoteness is already feasible.” In the meantime, Eldar and Verstein’s analysis sheds new light on a range of complex structures and highlights dynamics that will likely continue to drive financial innovation.
Cite as: Christopher M. Bruner, Asset Partitioning and Financial Innovation, JOTWELL (March 6, 2019) (reviewing Ofer Eldar & Andrew Verstein, The Enduring Distinction between Business Entities and Security Interests, 92 S. Cal. L. Rev. __ (forthcoming 2019), available at SSRN), https://corp.jotwell.com/asset-partitioning-and-financial-innovation/.
Adam Winkler, We The Corporations: How American Businesses Won Their Civil Rights (2018).
In We The Corporations, constitutional law scholar Adam Winkler reaches out to the public with a sweeping account of the role and place of the corporation in the creation and ongoing evolution of the American Constitution. This is a work designed to appeal to the educated citizen at large, and Winkler uses several powerful hooks to garner the audience he seeks.
The title, of course, is an obvious hook. The first three words of the Constitution, “We the people…” is evoked, with “corporations” replacing people. This book must be about how corporations have usurped the rights of people, resulting in a union that is perfect not for the people, but for the corporations.
But, of course, that is just the half of it. From the ratification of the Fourteenth Amendment in 1868 until 1912, the Supreme Court heard 312 cases dealing with corporations’ rights under that amendment but only 28 cases by African-Americans, the Amendment’s intended beneficiaries.
Winkler does deliver what his introduction and title promise. But this book is much more than its reader-grabbing packaging might first suggest. This is an historical tour de force, a majestic sweeping look at America’s corporate heritage and the co-evolution of the American corporation and the American nation.
Winkler begins with the corporate nature of the American colonies, and the importance of the company charter, and corporate rights, in shaping American understanding of how to protect fundamental human rights. When America sought independence from England, it was in large measure because the Crown insisted on infringing on the colonies’ rights of self-governance guaranteed in their colonial charters. Thus, “we the people” were in many ways consciously citizens of a corporation at the outset of the nationhood.
From there Winkler systematically but colorfully describes the major constitutional law cases and debates that lead us to Citizens United and Hobby Lobby. He begins with the earliest case, Bank of the United States v. Deveaux and delves deeply into the surrounding history. We see the importance of Blackstone’s Commentaries, and the battle between Jeffersonians and Hamiltonians over the fundamental nature of the Republic. We see great lawyers plying their craft as they attempt to sway the Supreme Court. And we see the three principle positions with respects to corporate rights that persist until this day—corporations are not “persons” and should have no constitutional rights, corporations are “associations of persons” and should be able to assert the rights of their members, and corporations are separate persons whose rights should be judged without regard to the rights that its members might have had if operating as partners or sole proprietors.
Winkler then carries us through the 200 years between Deveaux and the present, recounting the back story of the important cases that collectively provide our understanding of the constitutional rights of corporations. Among many others, we meet and see the influence of Louis Brandeis, Daniel Webster, Stephen Field, Theodore Roosevelt, Charles Evans Hughes, Adolf Berle, Ralph Nader, Thurgood Marshall, Lewis Powell, Jim Bopp, David Bossie and Ted Olsen. We see how the heavy determined hands of individual justices—Stephen Field in Santa Clara County v. Southern Pacific Railroad and subsequent cases, Lewis Powell in First National Bank of Boston v. Bellotti, and Samuel Alito in Citizens United—have inserted and broadened corporate constitutional rights in ways not required to decide the case at hand.
And we learn that the root of all evil is not the Supreme Court’s treatment of corporations as “people.” As Winkler notes throughout, a Supreme Court holding that corporations are separate persons has more often been used to limit than to expand corporate rights. Indeed, Hobby Lobby is based fundamentally on ignoring the corporation as a separate person and Citizens United is grounded in the rights of the listener.
As I noted at the outset, this book has been packaged to target a broad audience of generally educated citizens. However, this is a very sophisticated and comprehensive synthesis of the work of many scholars, including that of the author. It should be of immense interest to law students and law scholars of any discipline.
But if you are a corporate law scholar, this book should be of particular interest and value. And if you are a professor of corporate law looking to offer a seminar under a title such as “Corporations, Law and Society,” this would be a great starting point. The author’s ample and wide ranging notes will jumpstart and stimulate your course planning, and this book is one which you would surely assign to your students.
Cite as: Charles O'Kelley, Corporate Origins and Corporate Rights: American Law and the Corporation, JOTWELL (November 22, 2018) (reviewing Adam Winkler, We The Corporations: How American Businesses Won Their Civil Rights (2018)), https://corp.jotwell.com/corporate-origins-and-corporate-rights-american-law-and-the-corporation/.
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), https://corp.jotwell.com/accommodating-blockchain/.
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).
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 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.
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). ), https://corp.jotwell.com/the-human-side-of-markets/.
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.
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), https://corp.jotwell.com/distributed-ledgers-traceable-shares-and-the-division-of-power-in-corporate-law/.
Ed Balleisen, Fraud: An American History from Barnum to Madoff (2017).
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.
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)), https://corp.jotwell.com/how-much-do-you-really-know-about-fraud/.
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.
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)), https://corp.jotwell.com/talking-out-of-both-sides-of-your-mouth/.

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