Smart contracts and their promise of automatic performance capture legal and entrepreneurial imaginations. But the excitement around the technology led to some confusing legal responses. Several legal scholars use chronology to help reduce the confusion and place smart contracts within what is already familiar about computational contracting. According to this line of thinking, blockchain-based smart contracts simply represent the next technological advancement in a long history of computable contracting technologies. However, other scholarly work suggests that such a chronological explanation under-simplifies the nature of the linkages between smart contracts and other forms of code-connected contracts. This Article offers a unified theory of code-connected contracts as a tool for guiding risk allocation and design trade-off discussions when considering whether to use one or more forms of code-connected contracts. Specifically, this Article argues that the many variations of code-connected contracts should be viewed along an axis of state transition complexity. Doing so brings to the forefront the fact that the issues facing smart contracts used to merely automate performance of contractual obligations differ in terms of both magnitude and novelty from algorithmic decision-making tools used by parties to fill gaps in contractual terms and other computational contracting tools. In other words, the state transition complexity theory of code-connected contracts set out in this Article offers an analytical tool for anticipating legal and business risk when using computational contracts. Ultimately, the state transition complexity theory of code-connected contracts demonstrates that getting to the core legal issues presented by code-connected contracting requires an analysis of the details of each specific implementation. As with most legal questions, proper analysis depends on facts and circumstances. Nevertheless, many of the core legal issues will arise because emerging technology, like all technology, is social technology. Thus, the implications of the state transition complexity theory of code-connected contracts are that many of the legal issues are not terribly new, and we should not forget to look to existing jurisprudence and scholarly work in contract law and corollary disciplines.
At least 50% of Americans have not saved enough for retirement. This is in part due to a lack of access to employer-sponsored retirement plans. Nearly a third of the U.S. workforce is employed by businesses that choose not to sponsor workplace retirement plans for their employees. Moreover, plans set up by smaller employers tend to be plagued by high fees that eat away at retirement savings. To increase worker participation in low-cost retirement plans, lawmakers across the political spectrum have coalesced around reforms to allow more small employers to pool their assets and to centralize plan administration through multiple-employer plans. The efforts culminated in 2019 with the passage of the SECURE Act, which dramatically expanded access to multiple-employer plans. This Article shows that the bipartisan enthusiasm for expanding multiple-employer arrangements rests on shaky theoretical and empirical considerations. Drawing on newly hand-collected data for multiple-employer plans in effect prior to 2019, it argues that overlooked agency costs, market opacity, and the limits of the fiduciary governance regime have undermined the gains from asset pooling and centralized plan administration in existing multiple-employer plans. Furthermore, while larger single-employer plans typically leverage economies of scale and greater bargaining power to reduce plan fees, the benefits of plan size have not mapped directly onto existing multiple-employer plans. Instead, the Article reveals that total plan fees for existing multiple-employer plans are significantly higher than the fees for single-employer plans of comparable size. As policymakers and regulators implement expanded access to employer-pooling arrangements, this Article proposes governance measures to realize the full potential of aggregation for retirement savings programs in the United States.
Mechanisms of market inefficiency are some of the most important and least understood institutions in financial markets today. A growing body of empirical work reveals a strong and persistent demand for “safe assets,” financial instruments that are sufficiently low risk and opaque that holders readily accept them at face value. The production of such assets, and the willingness of holders to treat them as information insensitive, depends on the existence of mechanisms that promote faith in the value of the underlying assets while simultaneously discouraging information production specific to the value of those assets. Such mechanisms include private arrangements, like securitization structures that repackage cash flows from debt instruments to produce new financial instruments that are less risky and more opaque than the underlying debt, and public ones, like the rules allowing many money market mutual funds to use a net asset value of $1.00. This essay argues that recognizing these mechanisms of market inefficiency as such is a critical first step in devising policy interventions that achieve desired aims. This runs counter to the instincts of many market regulators, like the Securities and Exchange Commission, and academics who have often assumed that markets should be structured to promote information generation and efficiency. The essay further shows, however, that defenders of the information-insensitive paradigm have failed to provide a robust institutional account of how those mechanisms can remain robust across different states of the world or the government support required if they cannot. When an adverse shock or other signal raises questions about the value of the assets underlying an information-insensitive instrument, market participants can refuse, en masse, to treat those instruments as safe. Unless the government or some other actor can provide credible information about the value of the underlying assets or financial support that renders such information irrelevant, widespread market dysfunction can follow. When that happens, the very mechanisms of market inefficiency that had enabled a market to develop can exacerbate dysfunction. Following Ronald Gilson and Reineer Kraakman’s admonishment that institutions always matter, this essay calls for the development of rich institutional accounts of how the mechanisms of market inefficiency work, when and how they can fail, and what these dynamics reveal about the role regulators should play in these domains.
Through its opinions, the Delaware judiciary famously fires warning shots in the direction of corporate boards. How closely does Silicon Valley listen? This article considers the question by asking startup lawyers how a high-profile decision affects their advice to clients. In its Trados opinion, the Delaware Chancery Court tried to send a message to venture capital investors serving on startup company boards. The court criticized a board for approving a merger that, in accordance with customary Silicon Valley stock terms, resulted in a modest payout to investors holding preferred stock but no consideration to common shareholders. The case generated a flurry of law firm memos and law review articles predicting substantial changes to Silicon Valley deal making. Contrary to those predictions, Silicon Valley lawyers describe modest effects. The case does not appear to alter the customary terms of venture capital investments in startups, but it does appear to alter board process at the time a startup is sold. Boards now focus more squarely on how a transaction affects common stock and, in some instances, provide for payouts to holders of common stock beyond their baseline entitlements. Capturing this customary practice has important implications for Trados doctrine and Delaware fiduciary law more generally. It helps the Delaware judiciary assess the reach of its opinions, reveals ambiguities in current doctrine, and provides a baseline for defining appropriate board conduct.
This Article sketches a frame of analysis for the doctrinal quandary of manipulative practices in securities markets, drawing on the historical origins of the concept of market manipulation and the realities of the modern electronic marketplace. The essence of market manipulation is maintained to be in artificial pricing based on market activity, as opposed to other indicia of “artificiality,” and this definitional approach is compared and contrasted to the process of price discovery and liquidity provision. The Article addresses several key themes relevant for today’s securities markets, such as the phenomenon of exploratory trading, market making and the role played by market makers, the doctrine of open market manipulation, spoofing / layering and disruptive trading, and the implications of the market structure crisis.
Traditionalists believe that foreign policy is forged by conflict between the legislature and the executive, with the judiciary acting as referee. We reject that paradigm, and make the case that the country’s independent agencies, exemplified by its central bank, have become significant and independent foreign policymakers. The U.S. Federal Reserve System sometimes has imposed a globalist, cosmopolitan approach to international economic relations at loggerheads with the political preferences of the executive and legislative branches; at other times it pursues a form of rank nationalism at the expense of our allies. Our account complicates the paradigmatic story of foreign relations law, and identifies a problem – the independent agency foreign policy role is both necessary and unconstrained. To solve the problems posed by the Fed’s foreign policy, we identify a mechanism that might preserve central bank independence and yet support some of the advantages that accrue from tolerating the Fed as an independent foreign policy-maker. We argue that this solution may also be applicable more generally to the problem of regulatory diplomacy wherever it occurs in the administrative state.
This article traces the coming of apparent authority in the 18th and 19th centuries. Some confusion exists about the origins of this rule. It is often suggested that the doctrine has theoretical and historical roots in estoppel as an extension of actual authority. This article provides strong evidence that the apparent authority was - and should be thought of as - a true form of authority that grew out of developments in contract law rather than the rules of equity. This analysis contributes to the intellectual understanding of the history of commercial law and the law of agents.
Why do firms usually make, not buy, their chief executive officers (CEOs)? Public corporations hire their CEOs from within the firm 78% of the time. They do so although earlier studies have found no clear evidence that internal hires perform better than external ones. So why do firms prefer them? Few scholars have focused on this simple question. The reason why firms favor internal candidates matters not only in its own right, but also for an overlooked reason: it informs the controversial question of executive compensation. Currently board-compensation committees look to peer benchmarks to set executive pay. But, taking cues from comparable companies presumes a robust managerial market, one where firms must pay their CEOs or risk poaching. If firms predominantly hire from within, it is far from clear why benchmarking, with its concomitant upward pressure on executive pay across the board, is appropriate. Why firms hire internal candidates thus provides a theoretical basis for determining appropriate pay. For example, if candidates' superior knowledge of the institution (firms specific capital) drives the internal preference, then firms can pay less than a rate because no true market for managers exists: a CEO's value is tied up with a particular firm, and he cannot credibly threaten to leave. Similarly, if firms promote from within to inspire competition in lower ranks (tournament theory), then compensation should reflect the price needed to incentivize lower ranks to compete to become CEO. In contrast, if the board's better information on internal candidates (informational asymmetry) explains the preference, then a true market may exist for externals able to demonstrate their superiority. Which of these theories is motivating boards to favor internal candidates? To answer this question, this Article considers leadership in an area where the firm specific capital and information asymmetry explanations apply, but a tournament is absent: academia. Analysis of a sample of top university presidents reveals a bias in favor of external, rather than internal, candidates. This finding suggests that the tournament theory motivates public firms and has important implications for executive compensation policy.
American investors have begun to embrace the reality that academics have been championing for decades — that a broad-based passive indexing strategy is superior to picking individual stocks or investing in actively managed funds. But there are several reasons to believe that this trend will have harmful consequences for firm governance, shareholders, and the economy. First, because passive funds seek only to match the performance of an index — not outperform it — they lack a financial incentive to ensure that each of the companies in their very large portfolios are well run. Second, passive funds face an acute collective action problem: any investment in improving the performance of a company will benefit all funds that track the index equally, while only the activist fund incurs the costs. Third, passive funds do not generate firm-specific information as a byproduct of investing and thus must expend additional resources to identify underperforming firms and evaluate interventions proposed by other investors. Such expenditures would undo the cost savings that attracted investors to the passive fund in the first place. For these reasons, many passive funds will leave company performance to the invisible hand of the marketplace. And even if a fund does choose to intervene, it will rationally adhere to a low cost, one-size-fits-all approach to governance. The scope of this problem is potentially immense: as investors continue to flock toward passive investment vehicles, the institutional investors that dominate the passive fund market will increasingly influence and even control the outcome of shareholder interventions — from shareholder votes to those proposed by hedge fund activists — creating widespread economic harm. For that reason, this paper proposes that lawmakers restrict passive funds from voting at shareholder meetings. Doing so will reduce the influence of passive funds in governance and also preserve the role of informed investors as a force for managerial discipline.
Mutual fund portfolio turnover ratios (PTR) are at the center of the short-termism debate, which criticizes corporate maneuvers taken to prop up near-term earnings at the expense of long-term, value focused investments and policies. Scholars and policymakers often rely on portfolio turnover ratios to argue that mutual fund short-termism, as measured by the PTR, is increasing and infecting operating company time horizons. This article answers two main questions central to discerning mutual funds’ role in the short-termism debate. The first is, how long, on average do U.S. registered mutual funds hold onto their assets? The second is, how good of a measure is the PTR at approximating mutual fund holding patterns in light of criticisms that the PTR is an indirect measure, does not reflect fund flows, and excludes investment strategy considerations?Using a unique data set of U.S. registered mutual funds from 2005–15, this Article finds that mutual fund investment time horizons, as measured by portfolio turnover ratios, did not decline during 2005–15. This finding holds for all major categories of mutual funds, including index funds and actively managed funds and produced an average holding period in the range of fifteen to seventeen months. Based on this analysis, scholars and policymakers may think of mutual fund investment time horizons as short, but not shortening. These findings are confirmed by three alternative measurements of time horizons: Duration, Churn Rates, and Modified Portfolio Turnover. Consistent across-measure results mitigate PTR criticisms as a rough estimate of time horizons and endorse its continued use in SEC reporting. These observations also validate policymakers’ and scholars’ use of mutual fund PTRs in legal and policy debates, and contribute current, empirical evidence adding nuance to claims of mutual fund short-termism.Citation: Anne M. Tucker, The Long and the Short: Portfolio Turnover Ratios & Mutual Fund Investment Time Horizons, 43 J. Corp. L. 581 (2018).
The government’s recent crackdown on insider trading has revived an old debate about the wisdom of insider trading prohibitions. Opponents of insider trading laws often argue that insider trading contributes to market efficiency because it brings information to the market which gets incorporated into the price of the security, leading to more accurate pricing in a more timely fashion. Although this argument is intuitively appealing and has some empirical support, a look at some recent cases of known insider trading reveals situations where the market fails to detect the presence of informed traders, and even instances where the stock price moves in the contrary direction. This indicates that insider trading does not always bring information to the market, which undermines what is perhaps the most cogent argument for ending insider trading prohibitions.
