Rethinking MAC Clauses in the Time of Akorn, Boston Scientific, and COVID-19

The MAC clause is perhaps the most important clause in contract law, giving acquirers the ability to terminate even the largest agreements in the face of an often vaguely defined “Material Adverse Change.” For decades, even though MAC clauses have been present in nearly every merger agreement, courts have almost universally refused to enforce them. But the Delaware Chancery Court’s 2018 decision in Akorn may finally change that. As the world deals with the economic uncertainty caused by COVID-19, courts may soon get more opportunities to decide whether or not they will follow Akorn’s lead and begin to allow companies to exit agreements. In this Article, I argue that they should.

RegTech and Predictive Lawmaking: Closing the RegLag Between Prospective Regulated Activity and Regulation

Regulation chronically suffers significant delay starting at the detectable initiation of a “regulable activity” and culminating at effective regulatory response. Regulator reaction is impeded by various obstacles: (i) confusion in optimal level, form and choice of regulatory agency, (ii) political resistance to creating new regulatory agencies, (iii) lack of statutory authorization to address particular novel problems, (iv) jurisdictional competition among regulators, (v) Congressional disinclination to regulate given political conditions, and (vi) a lack of expertise, both substantive and procedural, to deploy successful counter-measures. Delay is rooted in several stubborn institutions, including libertarian ideals permeating both the U.S. legal system and the polity, constitutional constraints on exercise of governmental powers, chronic resource constraints including underfunding, and agency technical incapacities. Therefore, regulatory prospecting to identify regulable activity often lags the suspicion of future regulable activity or its first discernable appearance. This Article develops the regulatory lag theory (RegLag), argues that regulatory technologies (RegTech), including those from the blockchain technology space, can help narrow the RegLag gap, and proposes programs to improve regulatory agency clairvoyance to more aggressively adapt to changing regulable activities, such as by using promising anticipatory approaches.

The Hague Rules on Third-Party Joinder: A Revised Framework

This paper critically assesses the Hague Rules’ stance on third-party joinder. Third-party joinder is an important feature in business human rights disputes. It is a mechanism that victims of human rights abuses can use to bring claims against corporate defendants where the victims do not otherwise have an underlying agreement on which to base their claim. Keeping in line with traditional conceptions of commercial arbitration, the Hague Rules are grounded in party consent to arbitrate. Conceptions of consent therefore have an outsized impact on the universe of parties who can bring actions against corporations before arbitral tribunals for human rights abuses. The main objective of this paper is to offer an alternative framework of third-party joinder and consent to achieve a better balance between the interests of claimants alleging human rights abuses and corporate defendants. Part I traces the rise of arbitral tribunals as fora for business human rights disputes. Part II outlines the procedural shortcomings of third-party joinder in business human rights cases before arbitral tribunals under the Hague Rules. Part III advocates for a new framework to guide arbitral tribunals when assessing whether to allow requests for third-party joinder.

Precise Punishment: Why Precise Punitive Damage Requests Result in Higher Awards Than Round Requests

Imagine a setting where someone asks two people what the temperature is outside. The first person says it is 80 °F, while the second person says it is 78.7 °F. Research regarding precise versus round cognitive anchoring suggests that the second person is more likely to be believed. This is because it is human nature to assume that if someone gives a precise answer, he must have good reason for doing so. This principle remains constant in a variety of settings, including used car negotiations, eBay transactions, and estimating the field goal percentage of a basketball player. This Article reports the results of a first-of-its-kind study involving over 600 participants designed to measure if this same principle applies to punitive damage requests from plaintiffs’ attorneys. In other words, can a plaintiff’s attorney increase the punitive damages awarded simply by requesting $497,000 instead of $500,000. The stark differences produced from such a subtle and costless change provide a valuable strategy for plaintiffs’ attorneys, a cautionary warning for civil defense attorneys, and constructive insight into the subjective nature of juror decision-making.

Considering Sanctions Compliance in Light of UCC 4A

As part of a bank’s financial crime compliance program, it is increasingly common to screen and halt the processing of a payment order for compliance investigation where reference is made to a potential, but unconfirmed, target of United States economic sanctions. This essay discusses challenges under Article 4A of the Uniform Commercial Code concerning the timing of such an investigation and the creation of potential liability where a bank wrongly accepts by execution a previously halted payment order received from a sender following five funds transfer business days after the relevant execution date or payment date of that order. In Part II, this paper presents a brief overview of the use of funds transfers in the United States and reviews the application of Article 4A of the Uniform Commercial Code, including rejection, acceptance, cancellation, and amendment of a payment order. In Part III, the paper overviews United States economic sanctions, the implementation by banks of technology designed to identify and halt the processing of a payment order referencing a potential sanctions target, and the timeframe that may be required to investigate a halted payment order. In Part IV, the paper reviews application of Article 4A’s automatic cancellation and “money back guarantee” provisions where a payment order under its purview is wrongly effected and loss allocation between funds transfer parties for such events. Part V describes possible contractual and legislative changes to address the balance of Article 4A’s automatic cancellation of an unaccepted payment order after five funds transfer business days, sanctions compliance efforts undertaken by banks, and the policy goal of completing funds transfers efficiently.

Equity Market Structure Regulation: Time to Start Over

Over the past half-century, the U.S. Securities and Exchange Commission (SEC)’s regulations have become key determinants of the way in which stocks trade and the fees that exchanges charge for their services. The current equity market structure rules are contained primarily in the SEC’s Regulation NMS. The theory behind Regulation NMS is that a system of dispersed markets operating pursuant to SEC-mandated information and order routing links will provide the benefits of consolidation and competition simultaneously. This article argues that Regulation NMS has failed in that quest. It has produced fragmented markets and created questionable incentives for market participants, possibly producing socially excessive investments in trading speed and secrecy. It also discourages exchange innovation, provides insufficient incentives for traders to price orders aggressively, requires brokers to act against their customers’ interests, and forces the SEC to act as a price regulator. The article contends that the SEC should replace Regulation NMS with three simple design principles—issuer choice, exchange autonomy, and regulatory consistency. These would allow market forces, rather than regulatory mandates, to determine the design and pricing of trading platforms and the trading strategies of broker-dealers. They would better align the private incentives of trading platforms with the social objectives of improving liquidity and price discovery.

Bankruptcy & the Underwater Home: A Case for Real Property Redemption

Chapter 7 of the U.S. Bankruptcy Code exists to satisfy the claims of creditors and preserve an economic “fresh start” for the debtor after bankruptcy. In exchange for surrendering her property to the trustee to have it monetized (i.e., sold), the debtor receives a discharge of her debts and an injunction against future creditor in personam actions to recover them. However, the in personam injunction is insufficient to protect consumer debtors who are in default on mortgages encumbering underwater homes because the creditor’s in rem rights remain; after the conclusion of the case, the creditor can continue foreclosure proceedings, which result in eviction and often homelessness. The economic, educational, and health externalities of foreclosure and homelessness are detrimental to individuals and harmful to society at large. The Bankruptcy Code already possesses the tool to prevent these harms without disadvantaging creditors—the right to redeem under § 722—but currently restricts redemption to personal property. This Note argues for a statutory amendment to § 722 that extends the right of redemption to real property.

An FSOC for Continuous Public Investment: The National Reconstruction and Development Council

The crisis our nation presently faces does not stem from COVID-19 alone. That was the match. The kindling was that we have forgotten for decades that “national development” both (a) is perpetual, and (b) requires national action to guide it, facilitate it, and keep it inclusive. Hamilton and Gallatin, Wilson and Hoover and Roosevelt all understood this and built institutions to operationalize it. Although the institutions were imperfectly operated, they were soundly conceived and designed. Abandoning these truths and institutions these past fifty years has degenerated not only our public health but also our nation’s industrial and infrastructural muscle to a critical point. The same now increasingly holds for our social fabric. Full national regeneration—Reconstruction in both the post-Civil War and the mid-20th century senses of the word—has thus become a matter of urgent, even existential, necessity. Continuous national development, in the perpetual renewal sense of the phrase, must follow that Reconstruction. This is what “Building Back Better” must mean. Key to any such national project is how it is organized and then orchestrated. This paper proposes means of both organizing and orchestrating. These means are simultaneously incrementalist in their reliance upon existing institutions, while also regenerative in enabling new synergies among those same institutions—much as our Financial Stability Oversight Council (FSOC) is meant to enable our post-Lehman financial regulators to develop. An FSOC for national reconstruction and development will better use what we already have and augment it with a financing arm linked to the Federal Reserve and the Treasury. I call the resulting synthesis a National Reconstruction and Development Council (NRDC) and National Investment Council (NIC), which will both rebuild capacity now, and perpetually renew such capacity going forward, as knowledge and technology progress as they always do. Building Back Better means Building Back Now and Forever.

A Historical Analysis of the Investment Company Act of 1940

More than 100 million Americans invest $25 trillion in mutual funds and exchange-traded funds (collectively, “funds”) regulated by the Investment Company Act of 1940 (the “Act”), making funds the predominant investment vehicle in the United States. Everyday investors rely on funds to save for retirement, pay for college, and seek financial security. In this way, funds demonstrate how “Wall Street” can connect with “Main Street” to improve people’s lives. By way of background, funds are created by investment advisers (“advisers”) that provide investment advisory (e.g., stock selection) and other services to their funds in exchange for a fee. Investors purchase shares of a fund, which represent a pro-rata interest in the fund’s net assets—essentially, the securities chosen by the adviser—with the hope that the value of those assets, and in turn, the value of the fund, will appreciate. Although managing a fund is expensive, pooling investments from the public allows an adviser to spread its costs over an entire fund, which allows professional money management to be affordable for all. Prior to the Act, the unique structural aspects of funds, coupled with a lack of regulation, enabled rogue advisers to put their own interests ahead of those of fund shareholders. These structural aspects include that a fund typically relies on its adviser, which seeks to make a profit, to manage its day-to-day operations. Before 1940, adviser personnel also dominated the boards of directors of funds, which are responsible for overseeing the adviser and negotiating its compensation. This made funds susceptible to rogue advisers that were more interested in managing funds to benefit themselves and their “affiliates” (i.e., their employees and related businesses), as opposed to increasing the value of their funds. Recognizing the vital role that funds play for both the overall economy and the citizen of “small means,” the Securities and Exchange Commission (SEC) and the fund industry worked together to draft the Act, which Congress passed unanimously. The incredible growth of funds over the past 80 years is often attributed to the oversight and direction provided by the Act, which regulates all facets of fund operations and is arguably the most complex of our nation’s securities laws. Understanding the policy concerns that led to the Act helps to cut through that complexity and make sense of the Act’s provisions. As a result, this article focuses on those concerns, which can be thought of as guiding “Principles,” to demonstrate how the Act seeks to: (1) prevent insiders from taking advantage of funds they manage; (2) require effective disclosure; and (3) ensure the equitable treatment of shareholders. The Principles make the Act easier to apply by serving as shoal markers for conduct to avoid. But, just as a buoy indicates dangerous areas to avoid, the Principles also help guide conduct that steers clear of them. The Principles are thus a useful lens for interpreting the Act, particularly when considering novel situations or whether, per the “rubber” built into the Act, exemptive or other relief is appropriate. In these instances, harnessing the history and purpose of the Act can help advisers, fund directors, practitioners, and regulators apply the Act and ensure that funds remain a driver of national and, most importantly, investor gain.

LIBOR Phaseout: Litigation is Coming

This paper will explore the different steps market participants should take to make sure they are prepared when LIBOR is phased out in December 2021. Part I will focus on the actions market participants should do before going into negotiations that can increase their potential to reach a consensual agreement. Part II will explore what financial firms should be prepared for during the negotiation process and what claims may arise when no agreement is reached. The decision for how to handle any LIBOR-linked financial instrument in their portfolio should be left to the discretion of market participants themselves. This paper does not set out to make that decision, but it will communicate the urgency with which firms should act to either reach a consensual agreement or prepare for the legal risk and litigation costs of DEFCON 1.