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The Business Lawyer
November 2007, Volume 63, Issue 1 ARTICLES Form or Substance? The Past, Present, and Future of the Doctrine of Independent Legal Significance C. Stephen Bigler and Blake Rohrbacher, 63(1): 1-24 (November 2007) The "bedrock" doctrine of independent legal significance provides that, if a transaction is effected in compliance with the requirements of one section of the Delaware General Corporation Law ("DGCL"), Delaware courts will not invalidate the transaction for failing to comply with the requirements of a different section of the DGCL—even if the substance of the transaction is such that it could have been structured under the other section. Two recent decisions of the Delaware courts have caused commentators to question the doctrine's status, but this Article looks to the foundation of the doctrine and the Delaware courts' use of equitable review (and substance-over-form doctrines) to clarify when the doctrine of independent legal significance does and does not apply and when it may be relied on with confidence by corporate practitioners in the future. The doctrine as applied by the courts is narrower than sometimes assumed by corporate practitioners, and the Delaware courts may reserve the equitable power to look through a transaction's form to its substance even if the doctrine does apply. When Should Investor Reliance Be Presumed in Securities Class Actions? Roberta S. Karmel, 63(1): 25-54 (November 2007) Reasonable or justifiable reliance is one of the elements of a claim by a private party under section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"). Section 18 of the Exchange Act has an even stricter reliance requirement, but proof of reliance is not required for a claim under section 11 of the Securities Act of 1933. This Article will discuss the basis for these discrepancies and inquire into whether traditional interpretations of the reliance requirement need to be re-examined. There are at least two possible reasons for such a re-examination at this time. First, the reliance requirement is frequently presumed in securities class actions based on the efficient capital market hypothesis ("ECMH"), but the ECMH has come to be seriously questioned in the academic literature. Second, high-powered decision makers in several recent reports have asserted that U.S. capital markets are becoming less competitive than overseas markets due, in part, to the high level of civil liability under the federal securities laws. These decision makers recommend that the uncertainties as to the elements of liability under Rule 10b-5 be resolved. Once such element is reliance because the issue of reliance in the certification of class actions has become an actively litigated area and the decisions in these cases are often crucial to the outcome of the litigation. This Article argues that in developing the law of civil liability under Rule 10b-5, the courts should be guided by the doctrine that public companies impliedly represent that the statements they make in U.S. Securities and Exchange Commission ("SEC") filings and other required public utterances are truthful, and accordingly, they should be liable when materially false or misleading statements are made that cause damage to investors, whether or not investors can prove they read and relied upon such statements in purchasing or selling securities. Nevertheless, a plaintiff should be required to prove that such presumed reliance was reasonable. Such a theory of constructive reliance could be achieved through a reinterpretation of section 18 of the Exchange Act, through presumptions concerning reliance in Rule 10b-5 cases, or through legislation or possibly rule making by the SEC. This Article will discuss the common law action for deceit, its inapplicability to issuer fraud in modern securities markets, and the defects of section 18 of the Exchange Act as a substitute for the common law. The development of Rule 10b-5 actions as an alternative cause of action and the requirements for reliance in Rule 10b-5 cases will also be covered. This Article then will discuss the ECMH, the theories of its supporters and detractors, as well as its use by the SEC in formulating securities disclosure policy. Finally, a revisionist view will be presented of how the fraud-on-the-market doctrine should be used in connection with proof of reliance in securities litigation. An Uninvited Guest: Class Arbitration and the Federal Arbitration Act's Legislative History David S. Clancy and Matthew M.K. Stein, 63(1): 55-80 (November 2007) In recent years, there has been an explosion of "class arbitrations"—arbitration proceedings in which the claimant purports to represent a class of absent individuals. In this Article, the authors examine the legislative history of the Federal Arbitration Act ("FAA"), and argue that, in enacting the FAA, Congress intended to open the door to non-judicial dispute resolution proceedings with particular fundamental characteristics, and that class arbitration proceedings do not have those characteristics. The authors argue that class arbitration is therefore a novel type of non-judicial dispute resolution neither reviewed nor approved by Congress, and that, as a result, this "uninvited guest" should be subjected to close legal and public-policy scrutiny. The authors also identify multiple areas of particular concern, including, for example, that courts have been reviewing class arbitration decisions under the traditional standard of review highly deferential to arbitrators, suggesting that we are on a path toward the quiet establishment of a forum that adjudicates disputes involving hundreds, thousands, or even tens of thousands of individuals in decisions that are effectively unreviewable. The Missing Link in Sarbanes-Oxley: Enactment of the "Change of Control Board" Concept, or Extension of the Audit Committee Provisions to Mergers and Acquisitions Samuel C. Thompson, Jr., 63(1): 81-124 (November 2007) To address (1) the conflicts of interest that can arise in the acquisition of publicly held target corporations in various types of hostile and consensual merger and acquisition ("M&A") transactions, and (2) the risk of overpayment in major acquisitions by publicly held acquirors, Congress should require the appointment by the U.S. Securities and Exchange Commission ("SEC") of a disinterested Change of Control Board for such targets and acquirors. This Board would have complete authority over the acquisition process, and a federal uniform standard of review, the business judgment rule, would apply in determining if the board acted properly, thereby significantly reducing litigation in M&A transactions. Many features of the Change of Control Board proposal are similar to those provided for audit committees in the Sarbanes- Oxley Act of 2002; thus, this proposal is a logical extension of those audit committee provisions. In the event Congress does not enact the Change of Control Board proposal, many of the concepts underlying the proposal should be implemented by the SEC through its rulemaking authority under the audit committee provisions. At the Crossroads: The Intersection of Federal Securities Laws and the Bankruptcy Code Wendy Walker, Mike Wiles, Alan Maza, and David Eskew, 63(1): 125-146 (November 2007) This Article examines the ways in which the federal securities laws and the U.S. Bankruptcy Code do and, at times, do not work together, with an emphasis on the potential conflict between the Fair Funds Provision of the Sarbanes-Oxley Act of 2002, which permits the U.S. Securities and Exchange Commission to distribute penalties and disgorged funds collected from debtor-corporations to shareholders, and the "absolute priority rule," which prevents distributions to equity holders in Chapter 11 reorganization cases absent payment in full of creditors. Although touched upon in some of the largest bankruptcy cases in recent years, including Enron, WorldCom, and Adelphia, this potential conflict has not been squarely addressed by the courts and presents issues which should be examined by Congress. Having the Fiduciary Duty Talk: Model Advice for Corporate Officers (and Other Senior Agents) Lyman Johnson, 63(1): 147-162 (November 2007) Countless legal materials address the fiduciary duties of corporate directors. These include extensive decisional law, numerous institutes and continuing legal education seminars, several treatises and casebooks, and the well-known Corporate Director's Guidebook, recently released in its fifth edition. By contrast, legal materials on the fiduciary duties of corporate officers key actors and agents in any company are quite sparse. Case law is meager and undeveloped, with even such a baseline issue as the applicability of the business judgment rule lacking resolution. Treatises, institutes, and other legal materials frequently lump officer fiduciary duties with those of directors or treat them as an afterthought or, in many instances, overlook the subject altogether. There is no preeminent, standard reference serving as the "Corporate Officer's Guidebook." This Article seeks to begin rectifying this glaring gap in legal literature and professional practice. Fiduciary duties as a vital component of an effective corporate governance system work on an ex ante basis i.e., officers must be advised of such duties beforehand if such duties are to influence conduct. This Article describes the sources of legal material for deriving a succinct exposition of officer fiduciary duties and then provides suggested "model" fiduciary duty advice for lawyers to use in counseling corporate officers and other senior managers. The Loss Causation Requirement for Rule 10b-5 Causes of Action: The Implications of Dura Pharmaceuticals, Inc. v. Broudo Allen Ferrell and Atanu Saha, 63(1): 163-186 (November 2007) In order to have recoverable damages in a Rule 10b-5 action, plaintiffs must establish loss causation, i.e., that the actionable misconduct was the cause of economic losses to the plaintiffs. The requirement of loss causation has come to the fore as a result of the U.S. Supreme Court's landmark decision in Dura Pharmaceuticals, Inc. v. Broudo. We address in this Article a number of loss causation issues in light of Dura, including the proper use of event studies to establish recoverable damages, the requirement that there be a corrective disclosure, what types of disclosure should count as a corrective disclosure, post-corrective disclosure stock price movements, the distinction between the class period and the damage period, collateral damage caused by a corrective disclosure, and forward-casting estimates of recoverable damages. REPORT No Registration Opinions Special Report Subcommittee on Securities Law Opinions, Committee on Federal Regulation of Securities, ABA Section of Business Law, 63(1): 187-194 (November 2007)
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