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Washington and Lee Law Review - Print Edition

Article

by Michael A. Perino

In popular rhetoric, insider trading cases are about leveling the playing field between elite market participants and ordinary investors. Academic critiques vary. Some depict an untethered insider trading doctrine that enforcers use to expand their power and enhance their discretion. Others see enforcers beset with agency cost problems who bring predominantly simple, easily resolved cases to create the veneer of vigorous enforcement. The debate has, to this point, been based mostly on anecdote and conjecture rather than empirical evidence. This Article addresses that gap by collecting extensive data on 465 individual defendants in civil, criminal, and administrative actions to assess how enforcers operationalize insider trading doctrine. The cases enforcement authorities bring are shaped by a complex and cross-cutting set of institutional and individual incentives, cognitive biases, legal requirements, the history of failed enforcement efforts, and the way in which the agency and the self-regulatory organizations deploy their investigatory resources. SEC enforcement is dominated by small stakes, opportunistic trading by mid-level employees and their friends and family, most often involving M&A transactions. Those cases settle quickly, half within thirty days of filing. Criminal enforcement is generally reserved for more serious cases, measured by, among other things, the type of defendant, the size of the insider trading network, and the profits earned. In both settings, there is little evidence that enforcers are systematically stretching the boundaries of insider trading doctrine.

Article

by Scott J. Shackelford, Angie Raymond, Abbey Stemler, and Cyanne Loyle

Amidst the regular drumbeat of reports about Russian attempts to undermine U.S. democratic institutions from Twitter bots to cyber-attacks on Congressional candidates, it is easy to forget that the problem of election security is not isolated to the United States and extends far beyond safeguarding insecure voting machines. Consider Australia, which has long been grappling with repeated Chinese attempts to interfere with its political system. Yet Australia has taken a distinct approach in how it has sought to protect its democratic institutions, including reclassifying its political parties as “critical infrastructure,” a step that the U.S. government has yet to take despite repeated breaches at both the Democratic and Republican National Committees.

This Article analyzes the Australian approach to protecting its democratic institutions from Chinese influence operations and compares it to the U.S. response to Russian efforts. It then moves on to discuss how other cyber powers, including the European Union, have taken on the fight against digital repression and disinformation, and then compares these practices to the particular vulnerabilities of Small Pacific Island Nations. Such a comparative study is vital to help build resilience, and trust, in democratic systems on both sides of the Pacific. We argue that a multifaceted approach is needed to build more resilient and sustainable democratic systems. This should encompass both targeted reforms focusing on election infrastructure security—such as requiring paper ballots and risk-limiting audits—with deeper structural interventions to limit the spread of misinformation and combat digital repression.

Article

by Gregory H. Shill

The fiduciary duty of loyalty bars CEOs and other executives from managing companies for personal gain. In the modern public corporation, this restriction is reinforced by a pair of institutions: the independent board of directors and the business judgment rule. In isolation, each structure arguably promotes manager fidelity to shareholder interests—but together, they enable manager prioritization. This marks a particularly striking turn for the independent board. Its origin story and raison d’être lie in protecting shareholders from opportunism by managers, but it functions as a shield for managers instead.

Numerous defects in the design and practice of the independent board inhibit its ability to curb managerial excess. Nowhere is this more evident than in the context of transactions that enrich the CEO. When executive compensation and similar matters are approved by independent directors, they take on a new quality: they become insulated by the business judgment rule. This rule is commonly justified as giving legal effect to the comparative advantage of businesspeople in their domain—in determining the price of a product, for example—and it immunizes such decisions from court challenge. But independent directors can opt to extend the rule’s protection beyond this narrow class of duty of care cases to domains that squarely implicate the duty of loyalty. The result is a shield for conflicts of interest that defeats the major objective of the independent board and important goals of corporate law more generally.

This Article proposes to eliminate the independent board’s paradoxical shield quality by ending business judgment protection for claims implicating the duty of loyalty. Judges would apply the familiar entire fairness standard instead. The clearest rationale for this reform comes from the logic of the rule itself: comparative advantage. Judges, not businesspeople, are best situated to adjudicate conflicts of interest. More broadly, the Article’s analysis suggests that the pro-shareholder reputation of the independent board is overstated and may have inadvertently fostered a sense of complacency around board power.

Note

by Emily K. Dalessio

In its 2019 decision in Rucho v. Common Cause, the Supreme Court closed the doors of the federal courts to litigants claiming a violation of their constitutional rights based on partisan gerrymandering. In Rucho, the Court held that partisan gerrymandering presents a political question that falls outside the jurisdiction of the federal courts. However, the Supreme Court did not address an insidious consequence of this ruling: namely, that map-drawers may use partisan rationales to obscure what is otherwise an unconstitutional racial gerrymander. This Note uses North Carolina as an example of a state with a long history of gerrymandering—both racial and partisan. Over the course of the last quarter century, the Supreme Court has repeatedly struck down North Carolina’s redistricting efforts as the product of racial gerrymandering. Nonetheless, when the State changed its strategy, arguing that it based its redistricting efforts on partisan goals, the Supreme Court in Rucho ultimately declined to review the constitutionality of the map, allowing it to stand. This leaves voters potentially unable to challenge redistricting where, as is the case in North Carolina, race and political behavior are closely aligned and the map-drawers claim that the map was designed to secure partisan advantage, even if racial demographics were central to their considerations. In effect, Rucho creates a “magic words” test that incentivizes map-drawers to sanitize the legislative record of references to race, in favor of references to partisanship, in order to insulate redistricting plans from federal judicial review.

This Note suggests that the Supreme Court adopt a test to distinguish between racial and partisan gerrymandering using the approach the Court took in Flowers v. Mississippi—another 2019 decision. In Flowers, the Court placed great emphasis on Mississippi’s history of racial discrimination in jury selection in finding that the State had again violated the Equal Protection Clause in the case before it. Applying that logic to the issue of gerrymandering, this Note proposes a test that would presume that a challenged map from a state with a history of racial gerrymandering was a product of racial gerrymandering. The State would then face a high burden to rebut that presumption before the reviewing court could decide whether the case presents a political question under Rucho. The test this Note proposes would safeguard the right to vote, especially for Black and minority voters in states with histories of voter suppression and in so doing, ensure that the fundamentals of the democratic process are not subject to further erosion.

Note

by Corey J. Hauser

For decades the Supreme Court has balanced the tension between judicial efficiency and adherence to our constitutional system of separation of powers. As more cases were filed in federal courts, Congress increased the responsibilities and power given to magistrate judges. The result is magistrate judges wielding as much power as district judges. With post-conviction relief under § 2255, magistrate judges take on a whole new role— appellate judge—reviewing and potentially overturning sentences imposed by district judges.

This practice raises two concerns. First, did Congress intend to statutorily give magistrate judges this power? The prevailing interpretation is that § 2255 motions are civil, not criminal, proceedings able to be disposed of by magistrates. Still, at least one circuit court has disagreed, holding that § 2255 motions are criminal proceedings, incapable of magistrate disposition. Second, even if magistrate judges have statutory jurisdiction to decide § 2255 motions, does the practice violate separation of powers? When magistrate judges determine the validity of district judge-imposed sentences, non-Article III judges are given final say on whether an Article III judge sentenced an individual correctly.

This Note argues magistrate judge disposition of § 2255 motions is statutorily and constitutionally impermissible. It recommends that Congress limit magistrate judge power in § 2255 motions to issuing reports and recommendations, reviewed by district court judges. This recommendation achieves the twin aims of judicial efficiency and constitutionality, protecting the Judiciary, and the People, from intra-branch encroachment.

Tribute

by David Carson, Christine Greene, Mark Grunewald, Howard Highland, Brianne Kleinert, Brian C. Murchison, Debbie Price, Sheryl Salm, and Joan Shaughnessy

A tribute to Professor Mary Z. Natkin, who served on the faculty of the Washington and Lee University School of Law from 1987 to 2020. Professor Natkin is also an alumna of W&L Law, having graduated with the Class of 1985.

Article

by Benjamin P. Edwards

Investors, industry firms, and regulators all rely on vital public records to assess risk and evaluate securities industry personnel. Despite the information’s importance, an arbitration-facilitated expungement process now regularly deletes these public records. Often, these arbitrations recommend that public information be deleted without any true adversary ever providing any critical scrutiny to the requests. In essence, poorly informed arbitrators facilitate removing public information out of public databases. Interventions aimed at surfacing information may yield better informed decisions. Although similar problems have emerged in other contexts when adversarial systems break down, the expungement process to purge information about financial professionals provides a unique case study.

Multiple interventions may combine to more effectively surface information and generate better informed decisions. In quasi-ex parte proceedings, traditional attorney ethics rules must yield to a higher duty of candor. Yet adjudicators should not rely on duty alone. Adversarial scrutiny may emerge by designating an advocate to independently and critically engage in circumstances where no party has any real incentive to oppose an outcome. Ultimately, addressing adversarial failures may require a shift away from adversarial adjudication to a more regulatory framework.

Article

by Jessica Erickson

Merger litigation has changed dramatically. Today, nearly every announcement of a significant merger sparks litigation, and these cases look quite different from merger cases in the past. These cases are now filed primarily outside of Delaware, they typically settle without shareholders receiving any financial consideration, and corporate boards now have far more ex ante power to shape these cases. Although these changes are often heralded as unprecedented, they are not. Over the past several decades, derivative suits experienced many of the same changes. This Article explores the similarities between the recent changes in merger litigation and the longer history of derivative suits. The trajectories of these lawsuits are not identical, but they nonetheless suggest larger lessons about shareholder litigation, including the predictable ways in which agency costs play out in the courtroom and at the settlement table. By uncovering the lost lessons of derivative suits, corporate law can finally tackle the deeper issues facing shareholder litigation.

Article

by Jeffrey Manns and Robert Anderson

Incomplete contract theory recognizes that contracts cannot be comprehensive and that state law necessarily has to fill in gaps when conflicts arise. The more complex the transaction, the more that lawyers face practical constraints that force them to limit the scope of drafting and broadly rely on legal defaults and open-ended terms to plug holes and address contingencies. In theory Delaware law serves as lawyers’ preferred jurisdiction and forum for merger and acquisition (M&A) transactions and other high-end corporate deals because of the state’s superior default rules for corporate law and its judiciary’s expertise in discerning the “hypothetical bargain” of the parties.

This paper sets out to examine whether lawyers’ professed confidence in Delaware defaults actually shows up in the drafting of merger and acquisition agreements. Lawyers may base deals in Delaware law because of their familiarity with its provisions, or Delaware’s appeal may reflect the substantive adding of value in filling contractual gaps. Our premise is that the best proxy for examining lawyers’ reliance on a jurisdiction’s defaults is the extent of brevity in legal drafting, which is closely related to reliance on standards rather than rules. Incomplete contract theory predicts that reliance on defaults should broadly translate into implicit (and explicit) references to existing defaults that conserve time and space in drafting, especially through the use of parsimonious standards rather than prolix rules. To the extent to which comparable contracts grounded in different jurisdictions have systematic differences in length, this finding would serve as evidence that lawyers are placing greater reliance on the defaults of one jurisdiction compared to another.

In this paper we compare the length of public company merger and acquisition (M&A) agreements between Delaware transactions and those governed by the law of other jurisdictions. To the extent practitioners regard Delaware law as more comprehensive, more precise, or more settled (due to the Delaware General Corporation law, case law, or the judicial system) compared to other jurisdictions, then we would expect that Delaware M&A agreements would be more concise because of greater reliance on defaults and open-ended terms.

We found agreements governed by Delaware law are no shorter, and in fact are generally longer than agreements governed by the law of other states even when we accounted for a spectrum of control variables including the deal structure, the quality of law firms, deal complexity, and the size of the transaction. This finding held true even when we identified and controlled for the textual source of the precedent documents. Our results challenge the conventional wisdom about contracting parties’ placing greater reliance on Delaware law.

Our findings suggest that a gap exists between the Delaware legal system’s outsized reputation and the actual practice of lawyers in drafting M&A agreements who appear to place no more reliance on the defaults of Delaware law than on the defaults of other jurisdictions. This finding calls into question why Delaware’s statutory and judicial defaults do not appear to matter in the contracting context in which the Delaware difference compared to other states should be the most apparent. Lawyers’ confidence in Delaware may be genuine when it comes to steering incorporations and M&A litigation to Delaware. But if lawyers rely on the defaults of Delaware contract law no more (and perhaps less) in contract drafting than that of other jurisdictions, then it suggests that Delaware’s reputation for corporate law exceeds its substance. We conclude that the text is likely influenced far more by fortuitous events in the drafting process, such as the precedent chosen, than by the default rules of the jurisdiction.

Article

by Christina M. Sautter

Most would agree that the Delaware courts are the leading jurists in the resolution of corporate conflicts, particularly in the Mergers & Acquisitions (M&A) context. Arguably a greater role that Delaware plays is that of a norm setter, both with respect to the expectations of management conduct in the M&A process and with respect to deal terms, particularly deal protection devices. Like in any relationship, there is a “give and take” between practitioners and Delaware. That is, practitioners are “on the front lines,” often innovating with respect to new deal structures and deal terms. After some time, Delaware has the opportunity to review these innovations. As the Delaware courts render decisions, they comment on behavior in the deal process and on the legality of contractual provisions. In turn, practitioners take heed. They not only comply with these deal norms but, at least in the context of deal protection devices, they slowly push the boundaries. Delaware tends not to take issue with this boundary pushing as practitioners are largely complying with deal norms. This Article examines this relationship between practitioners and Delaware and argues that this circular effect has had the result of eroding the very enhanced scrutiny standards which the courts have announced.

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