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The Business Lawyer
THE BUSINESS LAWYER - February 2005, VOLUME 60, NUMBER 2 ARTICLES Corporate Officers and the Business Judgment Rule Lyman P.Q. Johnson 60(2): 439–469 (Feb. 2005) This article argues that the business judgment rule—a cornerstone concept in corporate law—does not and should not extend to corporate officers in the same broad manner in which it is applied to directors. The argument proceeds along both descriptive and normative lines. After first reviewing judicial decisions, the article concludes that, notwithstanding frequent, broad assertions to the contrary, application of the rule to corporate officers is not firmly established in case law. The article next examines the policy case by assessing three conventional rationales for applying the rule to directors and concluding, on balance, that the rationales do not fully translate into the officer context. The upshot is that courts should more closely scrutinize officer conduct than they now examine director performance. Those companies not wishing to expose officers to heightened liability risks may, by decision of the board of directors, refrain from asserting rightful claims ex post, or may contract a round that risk ex ante, either by eliminating liability altogether or substantially reducing it. Master Limited Partnership Governance John Goodgame 60(2): 471–506 (Feb. 2005) Master Limited Partnerships (MLPs) are publicly traded limited partnerships that typically own oil- and gas-related assets and provide tax-deferred cash flow to their investors. As of December 31, 2004, there were forty-one MLPs traded on the NYSE, the AMEX and the NASDAQ National Market, with a combinedmarket capitalization of over $58 billion. This article describes MLPs generally (including their structure, investor base and typical asset packages), reviews the legal, contractual and market-driven frameworks within which MLPs are governed, and discusses potential changes or refinements in MLP governance. Demystifying Causation in Fraud–on–the–Market Actions Merritt B. Fox 60(2): 507–532 (Feb. 2005) What must an investor who purchases shares on the open market of an issuer that has made a positive, materially false misstatement in violation of Rule 10b-5 show to establish causation in a "fraud-on-the-market" action for damages? Confusion has arisen in the courts concerning this question because they have analyzed the matter in terms of the twin concepts of "transaction causation" and "loss causation." They initially developed these concepts as a way of deciding causation in actions based on a showing of traditional reliance. Fraud-on-the-market actions involve a fundamentally different kind of causal connection between the defendant’s misstatement and the plaintiff’s injury, as recognized by the Supreme Court in Basic v. Levinson. Because of this fundamental difference in causal connection, the twin concepts of transaction causation and loss causation simply do not make sense in fraud-on-the-market actions. The focus in fraud-on-the-market cases should instead be on developing standards for what the plaintiff must plead and prove, and the acceptable forms of evidence, in order to establish that the defendant’s misstatement inflated the price at the time of purchase. Analyzing the problem from the ex ante perspective of the economics based approach to securities law reveals that these are the real issues underlying the causation cases coming before the courts. Causation by Presumption? Why the Supreme Court Should Reject Phantom Losses and Reverse Broudo John C. Coffee, Jr. 60(2): 533–548 (Feb. 2005) The Supreme Court will soon decide Dura Pharmaceuticals Inc. v. Broudo, a case in which the Ninth Circuit significantly liberalized the "loss causation" standards applicable to federal securities litigation. In reply to Professor Fox, who favors such a liberalization, Professor Coffee argues that any change in causation standards that permits a plaintiff to escape showing a decline in the security’s stock market price attributable to the material misstatement or omission gives rise to perverse incentives, which would likely result in the award of phantom losses that may have been caused instead by other factors, such as a market bubble. More generally, he argues that the securities class action against the corporate defendant in cases of secondary market stock drops appears to serve little legitimate function, advancing neither compensatory nor deterrent ends. Instead, such actions against the corporation (as opposed to actions against gatekeepers, controlling persons or the corporation in the primary market setting) principally affect inefficient wealth transfers among largely diversified shareholders. Given the legal and other transaction costs involved, shareholders appear likely to be net losers from such actions. As a result, he concludes that further minimization of the causation requirement should await policy clarification of the role of the "fraud on the market" action against a non-trading issuer defendant. The Shallows of Deepening Insolvency Sabin Willett 60(2): 549–575 (Feb. 2005) The article examines the so-called doctrine of "deepening insolvency," a vaguely expressed notion that defendants who had something to do with the worsening of the financial condition of an already-insolvent entity may be liable to that entity or its representative. The article notes the consensus of recent decisions that there is no independent cause of action for "deepening insolvency," and examines the problems that beset the efforts of an entity, or its representative, when it seeks to bring claims for the deepening of its own insolvency. It describes the fallacy of a recent darling of the cases: the addled notion that a loan may deepen insolvency. The article then posits that "deepening insolvency" does not represent even a valid measure of an entity’s damages. It summarizes the superficial scrutiny the concept has received in the decisions, and concludes with the proposition that "deepening insolvency" theory is a form of jurisprudential mischief that is at best superfluous: it describes no harm for which a remedy does not already exist. MENDES HERSHMAN STUDENT WRITING CONTEST PRIZE ESSAY Mendes Hershman Student Writing Contest Prize Essay: Disability and the Major Life Activity of Work: An Un-"Work"- able Definition Major John N. Ohlweiler 60(2): 577–610 (February 2005) SURVEY Introduction to the 2005 Annual Survey of Consumer Financial Services Law: The Tension Between Federal Preemption and State Law Applicability Intensifies Jeffrey I. Langer, Alvin C. Harrell, and Fred H. Miller 60(2): 611 (February 2005) Truth in Lending 2004 Timothy P. Meredith and Barbara Mishkin 60(2): 619 (February 2005) Recent Developments in Fair Lending and the ECOA: A Look at Housing Finance and Motor Vehicle Dealer Participation Nicole F. Munro, Jean L. Noonan, and R. Elizabeth Topoluk 60(2): 627 (February 2005) 2004 Developments in Motor Vehicle Leasing Thomas B. Hudson and Daniel J. Laudicina 60(2): 647 (February 2005) New Frontiers in Automotive Sale and Finance Products Kenneth J. Rojc and Gregory Eidukas 60(2): 663 (February 2005) Predatory Lending Legislation in 2004 Therese G. Franzén and Leslie M. Howell 60(2): 677 (February 2005) Developments in Credit Card Practices and Related Actions by the OCC to Protect Consumers Julie L. Williams, Michael S. Bylsma, Stephen G. Van Meter, and Kathryn D. Ray 60(2): 691 (February 2005) Update on Federal Preemption and State Mortgage Lending Laws Donald C. Lampe 60(2): 703 (February 2005) Consumer Financial Privacy Legislation and Regulation - 2004 Developments Michael A. Benoit and Elena A. Lovoy 60(2): 713 (February 2005) Consumer Privacy Litigation and Enforcement Actions Stephen F. Ambrose, Jr. and Joseph W. Gelb 60(2): 723 (February 2005) Implementing the FACT Act: Self-Executing Provisions Michael F. McEneney and Karl F. Kaufmann 60(2): 737 (February 2005) Federal and State Telemarketing Developments Carolyn S. Melvin 60(2): 749 (February 2005) Developments in Cyberbanking Mark T. Gillett, Obrea O. Poindexter, and M. Sean Ruff 60(2): 757 (February 2005) Consensus or Conflict? Most (But Not All) Courts Enforce Express Class Action Waivers in Consumer Arbitration Agreements Alan S. Kaplinsky and Mark J. Levin 60(2): 775 (February 2005) Current Issues in Consumer Arbitration Kelly Thompson Cochran and Eric J. Mogilnicki 60(2): 785 (February 2005) Class Action Update: The Increasing Scrutiny of Class Settlements And Other Developments Thomas M. Hefferon and Douglas A. Thompson 60(2): 797 (February 2005) The Federal Fair Debt Collection Practices Act: 2004 Review of Appellate Decisions Laurie A. Lucas and Alvin C. Harrell 60(2): 813 (February 2005) Consumer Bankruptcy Developments Jeffrey E. Tate, Ernest B. Williams, and Alvin C. Harrell 60(2): 823 (February 2005) MERGERS AND ACQUISITIONS: Annual Survey of Judicial Developments Pertaining to Mergers and Acquisitions he Subcommittee on Recent Judicial Developments, Negotiated Acquisitions Committee, ABA Section of Business Law 60(2): 843 (February 2005)
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